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Mortgages Explained - Which mortgage is right for you?

In simple terms, a mortgage is a financial loan that requires the pledging of a property as security or collateral for the loan. When an individual is interested in a home loan, he or she would contact a creditor who would use various factors including the credit history of the loan seeker to determine if the loan can be considered a good risk. If the lender agrees to give out the loan, the money is used to purchase a property, which is then used to secure the loan. The loan is then spread over several years, during which monthly repayments are expected to be made to the creditor to repay the loan, accrued interest plus other fees. If the home equity loan seeker is unable to repay the loan as agreed the lender can repossess the property to recover their investment.

Banks are the most popular sources of second mortgage loans. You can discuss with your bank or check out any other bank to get the best loan terms and rates. You can also use a mortgage broker who can offer valuable advice and help negotiate the best terms and rates on your behalf. Banks are however not the only sources of home equity loans. Other sources include government agencies, pension funds, credit unions and some other financial institutions.

Mortgage is a loan that has to be repaid along with interest and applicable fees and there are several fees associated with this loan. There are different types of home equity loans and depending on the type, the interest could be adjustable or fixed. The loan term could also be anything between five and 30 years.

If you are considering taking out a home loan to purchase your home you have to be careful to understand what is involved. Experience has shown that several people who are now facing foreclosures didn’t really understand the type of mortgage they took and the entirety of their financial commitment when they took the loan. You need to take time to understand the different types of mortgage available so as to determine the type that is best for you and your circumstance.

Adjustable interest rate

Adjustable-rate mortgage or ARM is a home equity loan that responds to prevailing market conditions. This means that the loan would not have a fixed interest rate. The interest rate would continue to fluctuate or adjust based on market conditions and current interest rates. If you go for ARMs, you should expect that the interest rate on you loan would continue to change and so would the monthly payments that you would have to make each month to service the loan.

ARMs slightly differ in terms of how regular the interest rates get updated. The regular practice is to update the interest rates annually, although there are some versions that update interests after every six months. There are also loans that adjust after two, three or even more years. There are also hybrid versions such as 5/1 ARM, which would carry a fixed rate for the first five years and then begin adjust annually. Or, ARM 3/3, with a fixed rate for the first three years and then adjusts every three years. This forms of loans also come with caps, so that even is market interest rates rise above the set cap, your applicable interest rates would not. Do not go for adjustable loans that don’t come with caps.

ARMS are usually attractive to some loan seekers because their initial interest rates are usually lower than interest rates for fixed interest home loan. People who plan to sell off the property in a few years are more likely to be attracted to ARMS, with the home that they can enjoy the relatively lower interests for a while and then offload the property in a few years for a profit. It is note worthy than a lot of people whose homes are foreclosing now had the same intention, but couldn’t sell the property and got stuck with it and run into problems if they can’t find a second mortgage to refinance it. It is thus best to fully understand the type of loan and weight it against your particular set of circumstances to decide if ARMs are the best for you.

Fixed interest loan

Fixed home equity loans are loans that carry a fixed rate for the duration of the loan or a specified period. Unlike adjustable interest loans that continue to responds to the set market interest rates, the interest on this loan would remain the same. This means that the monthly repayment amounts will also remain fixed. Some fixed interest rate loans have a fixed window after which the interest would revert to the variable lender’s rate. A fee is usually charged if the loan taker decides to change the interest from fixed to variable before the expiration of the period set for fixed interest.

Fixed loans are great for those who want the security of knowing what they need to pay every month and planning in advance for it. People with fixed income may prefer to pay a fixed amount to make repayment easier for them. This doesn’t mean that fixed interest loans do not have any drawback. It is best to fully understand the terms of the loan and seek professional advice.

Balloon loans

This form of loan is usually short termed lasting just about five to seven years but is amortized like a long term loan. The advantage of this form of loan is that the monthly repayments are quite low for the duration of the loan. However, at the end of the loan term, you end up owing the lender the balance, which is usually still very close to the original loan amount. If the loan taker fails to find a second mortgage to refinance the property, they would lose it.

Reverse

These forms of loans are designed for seniors over 62 years. It is a unique form of loan, where the senior can borrow against the value of their property. The seniors do not have to make any form of loan repayment as long as they are alive and residing in the property. They can decide to get the loan value as a lump sum or as monthly payments. This helps seniors with properties to be able to take care of their needs in the older years. The costs associated with these loans are quite high and so professional advice is also necessary.

Federal home loan

Some federal agencies offer discounted loans to those who qualify. The three federal agencies are FHA (Federal Housing Authority), RHS (Rural Housing Service) and VA (Veterans Administration). These agencies do not give out loans directly. What they do is to insure loans approved by other home loan lenders. This makes the lender more willing to give out the loan and take lesser interest as they are sure that the agencies would repay the loan if the borrowers default. The agencies all have different qualifying criteria and so you would need to research for more information.

Interest-only

This is not really a different type of mortgage. It is just an option that can be applied to any of the above type of loans. With this option, the borrower only pays the interest for a specified duration. The duration, which can be between three and 10 years, would be clearly stipulated in the contract and the loan balance remains unchanged during this time. This form of loan is great for people who don’t have stable incomes and first time borrowers who are yet to build up credit history. As usual, careful consideration and professional advice is necessary.

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