|
Many of us would love to buy a house today. But how many of us can really afford to flat out purchase a home. Some people have the money to fund a house. But believe it or not, 91% of America’s residents fund their homes through a mortgage loan.
A mortgage loan is a long-term loan used to finance a real estate investment, the loan is usually for a period of 15 to 30 years and the borrower makes monthly payments consisting of two payments the interest payment and the principal payment. The principal is the portion of the loan you are paying back towards the debt you owe, the interest payment is the cost you are incurring to borrow the money from a lender. For example if you borrow $1000 at 5% interest from a lender the $1000 you pay back is the principal and you will also have to pay interest of $50 to the lender which is the cost of borrowing the money. An interest rate of a mortgage is also referred to as a mortgage rate.
A mortgage rate is the interest rate of a mortgage loan, an interest rate is the cost you pay to borrow money from a lender. If your interest rate is 5% and you borrow $1,000 the interest (cost) you will pay to borrow that money is $50. Mortgage rates increase and decrease with economic circumstances and are highly dependant on the Federal Reserve and the interest rates they set for bonds. When interest rates decrease, consumers are more likely to invest in real estate and housing prices tend to increase, when interest rates increase consumers are less likely to invest in real estate and housing prices tend to decrease.
There are two types of mortgage rates fixed and variable (adjustable):
Fixed -The interest rate stays the same for the entire duration of the loan. If you can get locked in at a low interest rate and you believe interest rates are not likely to decrease any lower than this is a good rate to borrow at.
Variable - The interest rate fluctuate based on the market and economic conditions the rate moves up and down dependant upon the most current interest rates the Federal Reserve has set or the current index. Variable loans are more risky, however they can be beneficial if you enter into a loan at a time when interest rates are high and you expect them to decrease.
Here are examples of some different types of mortgages.
Adjustable Rate Mortgage (ARM) - A mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as a renegotiable rate mortgage, variable rate mortgage or Canadian rollover mortgage.
7/23 and 5/25 Mortgages - Mortgages with a one time rate adjustment after seven years and five years respectively.
3/1, 5/1, 7/1 and 10/1 ARMs - Adjustable rate mortgages in which rate is fixed for three year, five year, seven year and 10-year periods, respectively, but may adjust annually after that.
3/1, 5/1, 7/1 and 10/1 ARMs - Adjustable rate mortgages in which rate is fixed for three year, five year, seven year and 10-year periods, respectively, but may adjust annually after that.
Adjustment Date - The date that the interest rate changes on an adjustable rate mortgage (ARM).
Adjustment Interval - On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years depending on the index.
Adjustment Period - The period elapsing between adjustment dates for an adjustable rate mortgage (ARM).
Balloon Mortgage - A loan which is amortized for a longer period than the term of the loan. Usually this refers to a thirty year amortization and a five or seven year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.
Biweekly Payment Mortgage - A plan to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one half of the monthly payment required if the loan were a standard 30-year fixed rate mortgage. The result for the borrower is a substantial savings in interest.
Blanket Mortgage - A mortgage covering at least two pieces of real estate as security for the same mortgage.
Bridge Loan - A second trust that is collateralized by the borrower's present home allowing the proceeds to be used to close on a new house before the present home is sold. Also known as "swing loan."
First Mortgage - The primary lien against a property.
Fixed Rate Mortgage - The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower.
Fully Amortized ARM - An adjustable rate mortgage (ARM) with a monthly payment that is sufficient to amortize the remaining balance, at the interest accrual rate, over the amortization term.
|
