Selecting the Right Mortgage

There are a few more types of loans out there since I wrote this seven years ago. I have seen some interesting things go on during that time. All you need to really know FEE’s, PERFORMANCE and FOLLOW UP. USDA loans are my favorite but there is a spending cap.

Time spent shopping for a mortgage is time well spent. Before you rule out one loan or another, give some thought to your particular needs and wishes. Because you received a pre-approval before house hunting, you’re ahead of the game. You already know the standard of mortgages for which you qualify.

First, you should review the major kinds of mortgages you may encounter. This list doesn’t explain them all, but it does contain those you will most likely run into.

Closed Mortgage: In a Closed Mortgage, the interest rate is locked in for the full term of the mortgage. There are costs associated with breaking the mortgage term should you wish to either re-negotiate the interest rate, or pay off the balance prior to the end of the term.

Open Mortgage: In an Open mortgage, there is the flexibility to either pay out part or the entire balance of the mortgage at any time, with out having to pay a penalty. These mortgage are usually offered for 6 month or 1 year terms.

Convertible Mortgage An essential question to ask about an ARM is whether there are limits on how much your rate can be raised, both at each review and over the whole term of the loan. Without limits of some kind – known as “caps” – you’ll have no way to predict how much your rate (and thus your monthly payments) might change.

Under this arrangement, the buyer starts out with an ARM, but has the option of converting to a FRM at specified points during the loan term. You may want to ask the lender these questions: When can you convert? How often can you consider the option? Are there any up-front fees involved? Will you have to pay more for an ARM with the conversion feature than for an ARM without it? Are there additional fees due if and when you decide to convert? Find out what the lender’s conversion rate is.

Fixed-Rate Mortgage This is the standard mortgage model. It is the oldest and most easily understood type of mortgage. Its primary attraction is that the interest rate and the amount of payment remain fixed for the life of the loan, typically either 15 or 30 years. Fixed rate mortgages can be either open (paid out before the maturity date) or closed (cost associated to break the mortgage are applied, if paid out before the mortgage matures).

Variable Rate Mortgage (GEM) With this kind of mortgage, the interest rate you pay rises and falls along with other rates charged throughout the economy. Therefore, you, the borrower, assume the risk of rising rates, and you stand to benefit should rates fall. If the rates go up, more of the monthly mortgage payment goes to interest on your mortgage, however if the interest rates go down, more of the monthly mortgage payment goes to paying down the principal of your mortgage. Most Variable Rate Mortgages are open, and provide flexibility for you to take advantage of market conditions and the ability pay out your mortgage, or convert to a fixed rate mortgage, without having to pay any penalties associated with breaking the terms.

Fifteen-Year Mortgage Like the GEM, the fifteen-year mortgage enables borrowers to repay their loan more quickly, which means they build equity faster and pay less interest over the life of the mortgage.

Biweekly Mortgage Another option for people who want to repay their loans sooner is the biweekly mortgage. Instead of making a single mortgage payment each month, borrowers who choose this option make two equal payments monthly.

Federal Housing Administration Insured Loans (FHA) FHA insures, should one fail to pay, mortgage loans made by approved lending institutions. The FHA insures a variety of mortgages, including FRMs, ARMs, GEMs and GPMs. Down payments are low – five percent or less. The FHA doesn’t set the interest rate on loans it insures, so you’ll need to shop around for the best rate.

The FHA limits the amount it will insure to whichever is less: 95 percent of the local average home price or 75 percent of the loan limit set by the Federal Home Loan Mortgage Corporation, a large buyer and reseller of mortgages.

Veterans Administration Guaranteed Loans (VA) VA loans have most of the advantages of FHA loans, and then some, but they also have eligibility restrictions. They are available only to veterans of the armed services, those currently in the service and their spouses. VA loans typically are half a percent or more below market rates, and they can be obtained with no money down.