Today’s marketplace has an abundance of mortgage loan options. Choosing the loan that is best suited for you can be confusing and difficult, especially when you are unfamiliar with the jargon. Following are a few quick descriptions of basic mortgage types to help you gain insight in this area:

Fixed-Rate Mortgage
With a fixed-rate mortgage, borrowers get the security of knowing that their interest rate will stay the same throughout the life of the loan. This mortgage is especially popular when interest rates are historically low. It offers the certainty of knowing exactly how much interest will be paid as well as protection against future increases in rates. A downside is if market rates drop lower than the rate on the loan, payments will not drop accordingly. Borrowers have to refinance in order to take advantage of lower interest rates.

Adjustable-Rate Mortgage
Also known as an ARM, an adjustable-rate mortgage works just like the name implies. The interest rate varies throughout the term of the loan, adjusting up or down according to the index on which it is based. Monthly mortgage payments follow suit. The rate adjusts annually or on a schedule that the lender and borrower agree to. Most ARMs have caps that limit the periodic increases in addition to the total increase over the life of the loan. The starting rate of an ARM is typically lower than the going market rate. This lets borrowers initially take advantage of lower rates and perhaps even qualify for a higher loan amount. This lower rate comes with an assumption of risk of fluctuating, and potentially higher, future rates.

Hybrid Mortgage
This mortgage combines features of both fixed-rate and adjustable-rate mortgages. A hybrid mortgage loan starts with a rate that is fixed for a period of time. When that fixed-rate period expires, the loan then converts to an ARM. The initial rate for a hybrid mortgage loan is typically lower than prevailing fixed rates. The lower rate enables more buying power up front. On the risk side is the uncertainty of how high interest rates will be when the fixed-rate period expires.

Balloon Mortgage
A balloon mortgage generally has a short term, commonly anywhere from 3-7 years. During that term, borrowers make regular equal payments of principal – the amount of money borrowed – plus interest. At the end of the loan term, a “balloon” payment is due for the entire loan balance. Options for handling the balloon payment include paying off the balance when due or refinancing before the payment comes due. Balloon mortgages are usually offered at lower interest rates than other fixed-rate loans. In addition, payments are calculated using a period longer than the term of the loan. As a result, balloon loans offer affordability for short-term circumstances. Borrowers do need to plan ahead so they are not caught unprepared when the balloon payment is due.

Interest-Only Mortgages
What is commonly called an interest-only mortgage is really an interest-only option that works with various mortgage types. This option has regular payments, typically monthly, for a fixed period of time; however, payments consist of one hundred percent interest. No principal is paid during the interest-only period. When that period ends, the borrower is obligated to make payments of principal and interest. Because the time remaining in the loan term to repay the principal is shorter than it would have been, payments will adjust upward, sometimes substantially. The appeal of interest-only payments is savings. When principal is not being paid, monthly payments are dramatically lower. On the risk side is potential for loss. If the need to sell arises and the property value has stayed flat or declined, a borrower might be in a position where the mortgage loan balance is higher than the market value of the property.

Government-backed Mortgages
The Federal Housing Administration (FHA) and the Veterans Administration (VA) do not make home mortgage loans. They offer private lenders protection against loss from default. The intent is to encourage lenders to offer qualifying borrowers more favorable terms than they might otherwise receive on loans. The VA guarantees the loan when it is closed. FHA insures the loan. If a borrower defaults on an FHA loan, the lender is paid from an insurance fund. Both FHA and VA loans have maximum limits in addition to other qualifying criteria. Note that VA loans are for military veterans meeting established criteria. FHA has traditionally been popular among first-time homebuyers, lower-income borrowers, or borrowers with limited down payments.

These are a few examples of basic mortgage types. There are numerous loan programs available and many variations on terms within the types presented. Your mortgage loan decision is an extremely important one that has current and future financial consequences. When figuring out which loan makes the most sense for you, educate yourself. Sources of mortgage information include financial web sites, mortgage books, articles, and consumer workshops. Real estate professionals as well as mortgage lenders and brokers are also available to assist you in the education and selection process.

The FHA Home Loan Program

FHA, also referred to as, Federal Housing Administration, is a government backed loan. The loans are usually easier to qualify for and commonly used by people of less than perfect credit and lower income.

FHA loan program is one of the most popular loan programs available. Home buyers with little money available for down payment, can take advantage of FHA low down payment rates. FHA loan program offers you the ability to purchase a home with as little as 3 percent down. FHA loan programs are highly recommended for first time home buyers. However, FHA is not a loan provider; instead, it insures the loan provided to you by your lender. The lender is insured and paid through FHA insurance fund, if you default on your payments.

Who qualifies?
In order to qualify for a FHA loan, you will need:

• Satisfactory credit history

The lender will view your credit for delinquent accounts, collections and involuntary closed accounts. If your credit is poor, you most likely will not qualify for the FHA program.

• Established employment and employment history

The lender will view your employment history to verify your current position and your capabilities to repay your loan. FHA prefers individuals with two or more years at current position and/or in the same field.

• You must be able to pay the required closing cost and down payment. The closing cost normally range from 2-3% of home value and the down payment will be at the least 3% of the home value.

How much will I qualify for?
FHA requires your mortgage cost to be less than 29% of your gross monthly income. This amount includes PITI (principal, interest, tax, and insurance). To explain:

Your monthly income is multiplied by .29, which equals your maximum PITI. If for example your monthly income is 2500.00, your maximum allowed PITI equals $725.00

FHA requests that your mortgage and combined debt do not exceed 41% of your income. Debt is to include: mortgage expense, car notes, credit cards, other lines of credit, Child Support, Alimony, loans, etc.  Nevertheless, some of the above criteria may vary depending on lender.

One of the biggest decisions you will need to make when buying a home or property is what type of mortgage to choose. Your main choices will come under the umbrella of either a fixed rate mortgage or an adjustable rate mortgage.

Both of these mortgages have pros and cons, and your personal circumstances combined with your personal preference will help to determine which of these mortgage types you opt for.

Adjustable vs Fixed Rate

Fixed Rate Advantages
A fixed rate mortgage is very popular with those that want the peace of mind of fixed repayments for a specified period or for the life of the loan. If you are on a fixed income, if you plan to stay in the property for some time, or if you simply prefer fixed repayments for easier budgeting, a fixed rate mortgage can prove ideal. Although the initial rate is set higher than an adjustable rate mortgage, your can rest assured that your payments will remain the same each month even if interest rates rise.

Adjustable Rate Advantages
On the other hand, an adjustable rate mortgage offers a lower initial interest rate, which means that property purchasers can start on low monthly repayments. This type of mortgage means that you can also benefit from falls in the interest rate, as your payments are not fixed, although it also means that you are subject to rises in repayments as the interest rates go up. If you want to enjoy lower initial repayments or if you are planning to stay in your property for a shorter period, you could benefit from an adjustable rate mortgage.

Both of these mortgage types are very popular, and because there are benefits and disadvantages with both of these mortgages it is important to look at the whole picture and also to take your circumstances into consideration before making a firm decision. For instance, if you are on a fixed income or you plan to stay in your new property for some time, a fixed rate mortgage may be beneficial. If, however, you can afford to be flexible with repayments or if you are planning to stay in your new property for a shorter period, you may get more out of an adjustable rate mortgage.

To summarize, these are the main pros and cons of fixed and adjustable rate mortgages:

Fixed Rate Mortgages (FRM)

• The peace of mind that comes with fixed monthly repayments
• Easier budgeting due to fixed repayments
• No worry about rising repayments when interest rates rise
• Ideal for those on fixed incomes, those that want peace of mind, and those that want to enjoy more manageable budgeting
• These mortgages will not benefit from falling interest rates
• The initial interest rate is set higher than with an adjustable rate mortgage
• There is not as much flexibility with FRMs (Fixed Rate Mortgages) as with ARMs (Adjustable Rate Mortgages)

Adjustable Rate Mortgages (ARM)

• The starting interest rate with this type of mortgage is lower that that on a fixed rate mortgage
• An affordable mortgage solution for those looking to stay in their property on a short term basis
• Subject to repayment reductions when interest rates fall
• These mortgages are also subject to repayment increased as interest rates rise
• Can make budgeting difficult due to unpredictable repayments based on interest rate rises

More and more banks, credit unions and mortgage brokers are finding creative ways to help you afford the home of your dreams. With all of the financing options and terms, it can be a bit confusing figuring out which one is right for you. Here is some help for choosing the right home mortgage.

Selecting a Mortgage
There are two ways to approach selecting a mortgage. The first is to determine what kind of monthly payment you can afford or want to have for the property. If this mortgage is a way to finance your primary residence, then that figure will realistically be between 10 and 28 percent of your total monthly income.

Once you have determined what that magical figure is then you will need to deduct the monthly amount for property taxes and homeowners insurance from that number. Tax rates can vary greatly from region to region, but the bank or mortgage broker can help you find out what yours will be for a specific property.

Find the Best Rates
The second way to approach mortgage selection is to shop around for the best interest rates. The interest rate is the percentage you will pay to borrow a specific dollar amount to finance the property.

Sometimes there will also be an Annual Percentage Rate (APR) that differs from the published interest rate. This slightly higher rate is the actual cost of the loan and often takes into account the financing of closing costs or pre-paid percentage points that get you a lower overall rate.

The average mortgage is paid over either 15 or 30 years. The lower the amount of time you plan to finance the purchase, generally the better the interest rate. To make getting into a home more affordable, lenders will often offer products such as Adjustable Rate Mortgages (ARMs) where you pay a fixed lower rate (and lower payment) for 1, 3, 5 or 7 years and then the interest would adjust to the going rate in the 2nd, 4th, 6th, or 8th year, depending on which ARM you choose.

The shorter the ARM usually means the lower the rate. However, there is a greater risk that you could be facing a much higher interest rate when it adjusts. These are good products for people who know their income may increase significantly during that time, or if they know they will sell the property in just a few years. There are also caps on the amount an ARM can go up in a given year and over the whole life of the mortgage loan.

Those who plan to buy a home and stay there forever are usually better off with a fixed interest rate. This rate will remain the same, along with the payment of Principle and Interest (P&I) for the entire lifetime of the loan, either 15 or 30 years. This same type of person could benefit by paying points. This allows the purchaser to in a sense pre-pay some of the interest based on the amount borrowed against the property to get a lower interest rate for the long term.

Generally anyone planning to keep a property for more than 5-7 years can benefit by paying points. Most point options include paying between .5 and 2.5 points. So if the amount to be borrowed is $100,000 and you plan to pay 2 points, then at closing you would pay an extra $2000. This could potentially save the borrower tens of thousands of dollars in interest payments by lowering their interest rate for the next 30 years.

Buying your first property can be very exciting and can mark a real turning point in your life. However, for most it is a totally new experience, and therefore it can be difficult to know where to start.

Property purchasing can be a stressful experience even for those that have been through the process before, but a little preparation and advanced planning can go a long way towards making the process a lot smoother.

Home-buyer Tips

How much can you afford?
The first thing you need to determine is how much you can afford to spend on your property. One mistake that first time buyers make is to go around looking at properties, finding their dream home, and then realizing that they cannot come even close to affording it. This wastes time and can cause real disappointment.

Instead, use your valuable time wisely by working out how much you can afford. Most lenders will allow you to borrow around three times your annual household income, perhaps a little more in some cases. However, you also need to take into account any debts, as these will impact on the amount you can borrow.

The wisest thing to do is get an idea of how much you can borrow based on income and debt levels by going to a professional. This will allow you get a more accurate idea of how much you can afford to spend on your property, enabling you to look at potential homes that are within your price range. This can save you a great deal of time and disappointment.

Monthly Expenses
Another thing for first time buyers to consider are outgoings that must be worked into the monthly budget. If you have never lived independently before, you may not be aware of how much running a home can cost. You should look into the monthly costs for services such as utilities, and also take into account monthly costs for groceries, car running costs, and other necessary monthly payments. This is in addition to any ongoing commitments you have, such as credit cards, loans, insurance premiums etc.

Other considerations include down payments and money to actually set up your new home. The down payment required will depend on the lender you go through, but there are some good deals available for first time buyers. You can get a deal that allows you to put down just three percent – sometimes less – on your new home. This is a valuable bonus for first time buyers, as they do not have equity to put down in the same way as a buyer that has just sold their old property. You will also need cash to set up your new home, for items such as furniture and to pay for connections such as the Internet, cable etc. if required.

Type of Mortgage
If you decide that you can afford to take out a mortgage, and you are happy with the amount that you can borrow, you then need to determine what type of mortgage you want to take out. You can talk this through with your lender, but you should base it on your income, your expected future income, and your own personal preference. If you are nervous about rising repayments, then you can opt for a fixed rate mortgage. However, if you have the capacity to increase payments should the interest rate rise, you can opt for an adjustable rate mortgage.

Qualifying for a Home Loan

When applying for a home loan, lenders look at a variety of factors before deciding your qualifications. Such as:

Employment history and how long you have been at your current job
Most lenders are very strict when it comes to employment. Most lenders prefer buyers whom have steady employment history and at the least, two years at their current position. Employment plays an enormous factor in determining your ability to pay your mortgage. Lenders also use your employment to determine how much they are willing to lend to you.

Credit history and/or FICO Score
With your permission, lenders will request a copy of your credit report from the three major credit bureaus. Your credit is probably the most important factor to lenders. Lenders will view your credit to determine which loan programs you are qualify for.

Your credit report will let lenders know how responsible you are with paying your debts. They will view your credit report for unpaid collections and past due accounts. If your credit report list unpaid collection or past due accounts, your lender will request for you to pay the accounts or deny your request for a home loan. Some lenders determine the loan programs you qualify for based on your FICO score. Normally, they will request your score from each of the credit bureaus. Based on the three scores, either the highest of the three or the medium of the three will be used to determine your eligibility.

Current Debt
Most lenders will view your current debt as a negative. If you have a significant amount of debt, you will likely qualify for a reduced loan amount. Most lenders prefer your debt to be less than 30% of your income, including your mortgage.

It is important to remember every lender is different. You may not meet all factors and some you may out shine than others. Research lenders in your area and find a lender whom you feel will meet your needs. You should always verify the reputation of a lender before choosing one. There are lenders who specialize in working with individuals with poor credit; also, there are lenders who specialize in working with individuals with superb credit. If you have outstanding credit, your options of lenders will be broad; however, carefully choose a lender.