Getting a Mortgage - Weighing Your Options
When you are ready to buy your own home, you will probably
be quite excited. Owning a home is part of the American
Dream. On the down side, the home will come with a variety
of new responsibilities; in fact, the mortgage you get for
your home is likely to be the largest debt you'll ever
have. Since most people can't afford to pay cash for a
house, they take on a mortgage. Before getting a mortgage,
you should know about some of the choices you will have.
Your individual finances will determine which loan is right
for you. Here are a few of the common options for you to
consider:
What length or term of mortgage do you want? Thirty years
is the most common term, but other options are available,
some as short as 10 to 15 years. In general, the longer
the term, the lower your monthly payments will be. The
total payoff amount will increase accordingly. An extreme
example is an Interest Only Mortgage, which would never be
paid off. Interest only mortgages were common before the
Great Depression of the 1930's, but a record number of
foreclosures led to a change in policy. Today, these loans
remain "interest only" for a specified period, commonly
five to ten years.
Fixed Rate Mortgages – A fixed mortgage will lock you into
one interest rate for the life of the loan. Your mortgage
payment will not fluctuate over time, so the best time to
lock in a fixed rate is while interest rates are low. On
the flip side, because you are locked in at a certain
interest rate, you may miss further declines in rates
unless you refinance your mortgage.
Adjustable Rate Mortgages - Often referred to as ARMs, they
are the opposite of fixed rate mortgages. As interest rates
fluctuate, your interest rate and monthly payments will
vary accordingly. Commonly, adjustable rate mortgages have
an initial period where your rates are fixed. This period
can be as short as ten months or as long as ten years,
during which you'll have a set monthly payment and stable
rate of interest. Adjustable rate mortgages which remain
fixed for five years or more may also be referred to as
hybrid ARMs.
Most ARMs have a cap on the interest rate. There are
several options, including a periodic rate cap, which
limits how much your interest rates can change at a given
time, a lifetime rate cap, which puts a ceiling on your
interest rates, specifying the amount that your rate can
increase over the life of your mortgage, and a payment cap.
Payment caps are not as common, but they allow you to
place a limit on the amount your monthly payment can rise
over the length of your mortgage loan.
Sub Prime Mortgages – Sub prime mortgages are intended for
people with past credit problems. If you have made a number
of late payments, or have had other credit issues which
caused your credit score to drop below 620, you may need to
look for a lender that specializes in sub prime mortgages.
This kind of mortgage loan tends to carry higher interest
rates than a conventional mortgage; however, since
different lenders use different risk criteria to determine
eligibility, you should be able shop a variety of lenders
and find some bargains.
Be sure to compare several mortgage companies. You can get
free mortgage quotes online and choose the lender who
offers you the best rate and terms. You will also begin to
get a picture of your credit. If necessary, you can find
ways to increase your credit score. A little effort now
will pay off later when it's time to make that first
mortgage payment.
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Gregg Pennington writes articles on a number of topics
including mortgages, loan consolidation, and home equity
loans. For more mortgage information visit
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