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Reviewing The Different Types Of Mortgage Loans

Mar 19, 2008
First-time home buyers usually experience a mixture of feelings during the process of buying their first house and along with the excited anticipation they often also become stressed out and sometimes even intimidated by the whole process. First there is the decision about which home to buy, then getting the offer accepted, lining up inspections and making moving arrangements. Then there is the whole issue of the mortgage loans and the paperwork and "hoops" that they are required to jump through to complete the transaction.

The task of getting a borrowing is made even more challenging because of the various options that people have for mortgage home loans. It is important in the process of home-buying to obtain a clear understanding of the various types of mortgages that are available and to know the different benefits and risks associated with each type of home financing.

In order for a person to truly have confidence that the choice they are making in mortgage loans is the best for them is to learn about the industry and the various options that are available to the home buyer. The following few paragraphs outline some of the major points to be aware of when choosing a loan and a clarification of the differences between the loans that are adjustable and the loans that have a fixed-rate.

With borrowings that are commonly referred to as "fixed-rate mortgages," the amount of interest charged does not change at all during the life of the loan, which is typically 15 to 30 years in duration. This in turn means that the monthly mortgage home loan payments, which include the interest and principal, will stay the same. This helps the homeowner to effectively budget for their mortgage payments regardless of what happens in the mortgage market.

During periods when mortgage loan rates are trending upward, fixed-rate home mortgage loans can be the best option because the interest rate is "locked in." This protects the borrower from future rate hikes and means that they will not be subject to the fluctuations in the mortgage market.

Adjustable-rate home mortgage loans are commonly referred to as "ARMs" and the interest rate that is charged on these borrowings is periodically adjusted based on the market and financial indexes. The best time to choose adjustable rate home mortgages is when the mortgage rates are falling but you don't want to wait until they bottom out before you purchase your house.

There are a number of different types of adjustable-rate mortgage loans on the market and selecting one with the terms that best meet your needs can also be rather tricky. Not only do you need to take into consideration the direction that the mortgage market is headed, you also need to have an idea of what your income levels will be in the future.

One of the most popular types of adjustable rate home mortgage loans is what is referred to as the 10/1 adjustable rate mortgage. With this setup, the borrowing rates are fixed for the first ten years of the mortgage home loan. At the start of the eleventh year, the interest rate on the borrowing will be adjusted to reflect the current fluctuations in the market.

Depending on how the market has changed this could mean that your payments will increase or decrease. Each year after that and until the mortgage is fully repaid or you take out a refinance loan, the interest rate and your payment will continue to change in accordance with the market and the terms of the borrowing.

The best adjustable rate house mortgages will also have a rate cap so that the interest loan rates cannot jump up more than a certain percentage. For instance, if you had an ARM with a yearly cap of 1%, then that is the most it can go up, even if the overall rates in the mortgage industry had gone up more.

While the 10/1 adjustable rate mortgage is popular because it gives a new homeowner ten years before having to worry about their payments increasing, there are also adjustable mortgage loans that offer many other terms. Some will be fixed for five years, then change each year after that. Still other adjustable mortgages are fixed for only one year and the rate is adjusted every six months.

The best advice is to find a rate and terms that you are comfortable with, but also to make sure that you fully understand how a rate change can affect your monthly payment. In the long-run it might be better to choose an adjustable rate mortgage home loan that has a slightly higher interest rate to start out with but that is adjusted infrequently.

Many people have gotten into financial difficulty by committing to an adjustable home financing arrangement that started out with very low loan rates but which quickly became unaffordable because of frequent increases in their interest rate.

If you are unclear about how the fluctuating mortgage market might affect your monthly payment, then it is a good idea to spend some time with an accountant who can help you to make sense of the numbers. When it comes to mortgage loans, keeping an eye on the long-term costs instead of looking for a "deal" can often help you avoid financial traps and difficulties.
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