Getting a Mortgage – Weighing Your Options

When you are ready to buy your own home, you will probably be quite excited. Owning a home is part of the American Dream. On the down side, the home will come with a variety of new responsibilities; in fact, the mortgage you get for your home is likely to be the largest debt you’ll ever have. Since most people can’t afford to pay cash for a house, they take on a mortgage. Before getting a mortgage, you should know about some of the choices you will have. Your individual finances will determine which loan is right for you. Here are a few of the common options for you to consider

What length or term of mortgage do you want Thirty years is the most common term, but other options are available, some as short as 10 to 15 years. In general, the longer the term, the lower your monthly payments will be. The total payoff amount will increase accordingly. An extreme example is an Interest Only Mortgage, which would never be paid off. Interest only mortgages were common before the Great Depression of the 1930’s, but a record number of foreclosures led to a change in policy. Today, these loans remain interest only for a specified period, commonly five to ten years.

Fixed Rate Mortgages – A fixed mortgage will lock you into one interest rate for the life of the loan. Your mortgage payment will not fluctuate over time, so the best time to lock in a fixed rate is while interest rates are low. On the flip side, because you are locked in at a certain interest rate, you may miss further declines in rates unless you refinance your mortgage.

Adjustable Rate Mortgages – Often referred to as ARMs, they are the opposite of fixed rate mortgages. As interest rates fluctuate, your interest rate and monthly payments will vary accordingly. Commonly, adjustable rate mortgages have an initial period where your rates are fixed. This period can be as short as ten months or as long as ten years, during which you’ll have a set monthly payment and stable rate of interest. Adjustable rate mortgages which remain fixed for five years or more may also be referred to as hybrid ARMs.

Most ARMs have a cap on the interest rate. There are several options, including a periodic rate cap, which limits how much your interest rates can change at a given time, a lifetime rate cap, which puts a ceiling on your interest rates, specifying the amount that your rate can increase over the life of your mortgage, and a payment cap. Payment caps are not as common, but they allow you to place a limit on the amount your monthly payment can rise over the length of your mortgage loan.

Sub Prime Mortgages – Sub prime mortgages are intended for people with past credit problems. If you have made a number of late payments, or have had other credit issues which caused your credit score to drop below 620, you may need to look for a lender that specializes in sub prime mortgages. This kind of mortgage loan tends to carry higher interest rates than a conventional mortgage; however, since different lenders use different risk criteria to determine eligibility, you should be able shop a variety of lenders and find some bargains.

Be sure to compare several mortgage companies. You can get free mortgage quotes online and choose the lender who offers you the best rate and terms. You will also begin to get a picture of your credit. If necessary, you can find ways to increase your credit score. A little effort now will pay off later when it’s time to make that first mortgage payment.

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