You have found the house you want to buy and now need to look at your mortgage finance options. Before you contact mortgage brokers for a quote, you need to make sure that your credit report is sparkling clean. A low credit score can easily be used by the banks to raise your interest rate by a few percentage points, which can cost you HUNDREDS OF THOUSANDS at the end. It is also important to shop around, regardless of what your real estate broker tells you.
There are many terminologies that will come up in the mortgage setting and can be confusing or even intimidating. You shouldn’t feel so. Just handle it as if you want to borrow $100 from a friend. The concept is essentially the same. Below are the key variables that you will need to focus on when you are planning to move on with your mortgage.
Fixed Rate Mortgage
This mortgage option gives you a fixed mortgage rate, and hence a consistent payment amount every month. This is historically the standard type of mortgage loan in the US. The up side of taking this fixed rate is similar to have insurance on the interest rate – if the interest rate goes up, you don’t have to worry; if the rate goes down, you are always free to seek a refinance. The down side to this is that it is usually a bit higher than the adjustable rate.
Adjustable Rate Mortgage (also know as Variable or Floating Rate)
This mortgage option allows your mortgage rate to adjust (therefore, your payment will adjust as well) as the interest rate fluctuates. This is considerably riskier than the Fixed Rate Mortgage because a small change in the interest rate can result in a big change in your monthly payment amount because of compound interest. This is usually preferred by people who believe the property value will increase in the near future and they can sell it for a profit, which is known as condo flipping or property flipping.
Interest Rate
This is what the bank will charge you for the money you are borrowing for your house. This is determined by your credit report as well as the risk that you default on the loan. A very good credit history and proof of steady income are the keys to convince the lending institution to provide you with a reasonable rate.
Interest Only Loan
This mortgage loan differs from the others because you will never own the home with this option. What this means is that you will be paying only the interest payment for the loan amount and nothing on the principal. This is very popular among older people when the interest rate is low enough to make it more attractive than renting.
Term of Loan
This is the duration of the loan, up to 30 years, with 15 and 30 being most common. Depending on the loan amount, you can pick the term that best fits your monthly payments.
Prepayment
This is if you pay more than your monthly installment. You need to make sure that your bank does not have a clause on your loan that penalizes you for prepayment (also know as early repayment) of the loan. This is especially important if you are expecting an increase in your future income which allows you to pay off the mortgage before the term ends.
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