Understanding a Mortgage

What kind of mortgage do you want?

Not every type of lender deals with every time of loan.

• Fixed rate – The interest rate stays the same over the life of the loan, usually 15 years or 30 years.
• Adjustable rate — The interest rate fluctuates based on market indicators. An adjustable rate mortgage (ARM) often starts out with a fixed rate for a few years, then fluctuates over the life of the loan.
• Balloon – The mortgage is short-term (five-ten years) and is not fully paid-off at the end of its term. The borrower then pays off the remaining balance or finds a new loan.
• FHA loans — The Federal Housing Administration (FHA) will insure loans made to qualifying applicants.
• VA loans – The Veteran’s Administration (VA) doesn’t make mortgage loans, but guarantees part of the loan for qualifying veterans and active military personnel. If borrower defaults, the VA pays the lender the amount guaranteed and the borrower, in turn, will owe the VA.

Know what rates are out there

Like the stock market, mortgage rates change daily. You won’t know if a lender is offering you a good rate if you don’t know what’s going on in the world of rates.Do an online search to compare rates – a good baseline is the rate for a 30-year fixed loan. Just make sure you’re comparing “APR” (annual percentage rate) to “APR” for each lender. Some lenders will offer you a really low rate, and then you find out later there are lots of extra fees. The APR rate includes the lender’s rate plus their fees.

There are online resources like FreeRateUpdate and MortgageDailyNews that can help you in this research. Just be careful about internet based lenders because they may try to sell your information to a less than reputable lender or mortgage broker. Always compare their rates with local lenders.

Understand mortgage points

A point is an additional fee you pay upfront. The price of one point equals to 1% of the amount borrowed.

• Origination Points – Most lenders charge you a fee to give you a loan, an origination fee, which is calculated as points.The origination fee is usually the biggest part of your closing costs and added to the loan amount. Different banks charge different amounts of origination points, and some banks don’t charge origination points at all. This is something to consider when you’re shopping around for a loan.Make sure you ask about origination fees when you interview a lender; you might be able to negotiate how many points you are charged if the lender knows you are doing comparison shopping.
• Discount Points – Many banks will offer you the opportunity to pay points in order to lower your interest rate and your monthly payment.The benefit for the bank is that it gets more of your money upfront; while most closing costs can be rolled into the mortgage, discount points cannot, so if you are paying for points, you need to come up with more cash upfront, in addition to your down payment.

One point will usually buy you 0.25% off the original interest rate.Paying for points only makes sense if you plan on living in your home long enough to make it worthwhile. This calculator helps you estimate whether Points will be a wise investment for you.