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What is a Mortgage?
A mortgage is the name given to a loan secured on your home. It is usually used to buy the home although it is becoming more popular to consider a new mortgage, where the property is already owned, to access a more competitive mortgage product or to raise capital for other purposes, such as school fees, business investment or buy to let.
A mortgage is a long-term loan and traditionally has run for a fixed period, typically 25 years. However, most mortgages are flexible enough to allow for early repayment or, if your circumstances dictate, the term can be extended beyond the original loan period.
Mortgages were once the preserve of building societies and the high street banks, however recently far more competition has entered the market and there is now a raft of lenders offering mortgage loans on residential property. This expansion in the number of lenders has lead to a vast array of different loan packages. Nowadays there are loan deals to suit most people's needs, whether you are buying your first home, a retirement cottage or perhaps an investment property.
What is a Balloon Mortgage?
A balloon mortgage is typically amortized over 30 years, but the balance becomes due prior to 30 years. For example, a five-year balloon may have payments based on a 30-year mortgage, but after five years the borrower must pay the remaining balance in full or refinance the mortgage
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage provides an interest rate that is fixed for the life of the loan. A fixed-rate provides maximum payment stability.
What is an Adjustable Rate Mortgage?
An adjustable rate mortgage (ARM) has a rate that's guaranteed for an initial period of time, then adjusts based on market conditions. Many adjustable rate loans can be converted to fixed-rate loans. The length of the initial rate, the method and limitations of the adjustments, and the convertibility of the loan to a fixed-rate varies with the loan product. Borrowers have substantial flexibility due to a large variety of ARM products from which to choose, making ARMs a wise choice for many borrowers.
What Type of Mortgage Should I Get?
There are a multitude of mortgage types currently available, though most mortgages fall into one of three categories: Conventional, VA or FHA.
Conventional mortgages are the most common and most flexible and are not insured or guaranteed by any government entity. Down payments typically range from 3% to as much as desired, though some 0% down payment programs are available. Typically, mortgage insurance (non-government) is required for conventional loans with down payments less than 20%. However, alternative options are available that provide loans without mortgage insurance even with very low down payments. A loan officer can best direct you to a program that meets your objectives.
VA loans are guaranteed by the Veterans Administration and are available to qualified veterans. The primary benefit of a VA loan is the ability to obtain 100% financing. The veteran pays a funding fee to the VA at closing, and the fee may be included in the loan. The funding fee varies from 0% to 3% of the loan amount, depending on a variety of factors.
FHA (Federal Housing Administration) loans require very low down payments and are insured by the FHA. A one-time premium is paid at closing and a small monthly premium is included in the loan payment. The amount of the up-front and monthly premium varies with the term of the loan and the loan-to-value ratio.
What is an APR?
APR is short for annual percentage rate. It's a formula that considers some of the costs of acquiring a loan along with the actual rate of the loan, then translates those costs into the equivalent rate for a loan without those costs. It's an attempt to provide a standard for comparison. However, borrowers who use APR as a basis for a loan decision without fully understanding APR frequently make a less-than-optimum decision.
Should I Refinance?
It would be fantastic if a glimpse into the future could determine whether or not refinancing is applicable, but there are many variables that should be considered to arrive at a sound financial decision. Our mortgage calculator section is a good place to begin, but it's best to make the final decision after consulting a loan officer who understands the many hidden advantages and pitfalls of refinancing.
One particular caution is the "two percent" myth. The industry is riddled with the mistaken belief that refinancing is worthwhile only if the new rate is two percent lower than the current rate. That's like saying you shouldn't buy a new house unless it's at least 20% larger than the current house! In some cases refinancing may be worthwhile for a very small drop in rate; in other cases refinancing may not be worthwhile even with a huge reduction in rate.
A few important considerations include:
- The total cost of the refinance-not just the out-of-pocket costs
- The length of time the new loan will be kept (Does the savings offset the cost of the refinance?)
- The impact of a new loan on the salability of the home (e.g., low-rate assumable loans can be highly beneficial in the marketing of a home.)
- The stability of the new loan compared to the old loan (e.g., refinancing an adjustable rate loan into a fixed-rate loan.)
When can I lock in an Interest Rate?
It all depends on the loan product and the lender. Some interest rate lock-in periods are as short as seven days, but most reputable lenders provide for a range from seven to at least 60 days. Extended rate-locks are available with lock-in periods as long as 270 days. However, these extended locks may require extra discount points or a slightly higher interest rate. A loan officer can provide detailed information based on your requirements.
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