Learn More Information About Mortgage Loans

When you obtain a mortgage loan, you borrow the principal, the amount of money required to pay for the property, and you pay interest, what the lender charges you to borrow the money. The way mortgage loan payments are spread out over the life of the loan, you pay more in interest than principal in the early years, which gradually reverses itself as mortgage loans age.

Mortgage loans come in a variety of flavors, one of which will best suit different borrowers with different situations. To find the best mortgage loan for your needs, think about your short and long term plans, your financial goals and your risk tolerance. Here are some scenarios to consider, along with the generally recommended types of mortgage loans for each. Individual borrower situations vary. Contact your Loan Advisor for specifics on what is best for your situation. If you plan to live in your home for many years, look for a low interest rate over a long period of time.

Since you're going to be making payments for many years, your best strategy may be a fixed rate mortgage loan and pay points to get your rate as low as possible. If you want to budget for a fixed payment each month, or don't want to risk paying higher interest rates, Avoid adjustable-rate or balloon mortgage loans. A fixed rate mortgage loan has a principal and interest payment that stays the same for the entire term of the mortgage loan. Mortgage loan terms can range from 10 to 40 years, though the most common is a 30-year loan. Many borrowers take advantage of another option: a "biweekly" mortgage, where you pay half of your monthly payment every two weeks. This results in an extra payment being made every year, which shortens your mortgage term. Fixed rate mortgage loans are the most stable and the least flexible mortgage loans. They are recommended if you are planning to keep your home for many years, can easily qualify for the loan amount, want to lock in a low rate and expect overall interest rates to increase or remain the same.

If you plan to sell or refinance your home in just a few years, you may wish to avoid points and closing costs, since the difference in interest payments won't typically make up for your out-of-pocket expenses at closing. Also, look for a mortgage loan that enables you to commit to a smaller down payment. An ARM is usually a good choice for holding rates down for a set number of years. If you want to pay off the mortgage loan by the time you retire or your kids are in college, shorter-term mortgage loans are an excellent way to ensure that you can use your income for other goals later in life. Another benefit is that you build equity faster. If you are comfortable with the risk of higher interest rates if it means you can qualify for a larger mortgage loan right now. Adjustable rate mortgage loans are a great solution for people with incomes that are going to grow and who will quickly refinance or be able to afford a larger payment in a few years if interest rates rise. An adjustable rate mortgage (ARM) is a mortgage loan with an interest rate that adjusts periodically to reflect changes in a specified financial index, such as the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI) or others.

ARMs may adjust every six months or once a year. Most ARMs have a cap that protects your monthly payment from increasing too much, as well as a lifetime cap, a rate that your ARM will never exceed. ARMs generally have the lowest initial interest rate and payment and will usually guarantee that rate for a fixed period -- anywhere from a month to 10 years, as in a "two-year ARM" or a "five-year ARM." You also may qualify for a larger mortgage loan amount with an ARM than with a fixed rate mortgage. ARMs are recommended if you plan to keep the mortgage loan for a short time -- for example, if you plan to move and sell the house within the three-year fixed term of the mortgage loan.

With an ARM, you do risk your interest rate increasing, but you also have the advantage when rates go down, because your payment will go down and you can pocket more money each month. To pick the mortgage loan that's right for you, we recommend first determining how long you think you'll live in your new home and then working with a loan advisor to optimize your monthly cash flow. Learn more about mortgage loans today!