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Mortgage 101

By Kerry Lucasse |

 

understanding mortgagesMortgage 101 – Understanding the Basics

When you are ready to purchase a home, the mortgage process can be the most confusing — lots of lingo, acronyms, terms, options and a wide range of interest rates and closing costs. In this article, we are just going to start with the basics:

INTEREST RATES

  • Fixed or adjustable interest rates — A fixed rate allows you to lock in a low rate as long as you have the mortgage and is almost always a good choice, especially when the interest rates are at historic lows. An adjustable-rate mortgage (also called an “ARM”) is designed so that your loan’s interest rate will rise as market interest rates increase. ARMs usually offer a lower rate in the first years of the mortgage. ARMs also usually have a limit as to how much the interest rate can be increased and how frequently they can be raised. The adjustable rate mortgages (ARMs) can be a good choice with the current interest rates are high and/or when you expect your income to grow significantly in the coming years.

LENGTH OF MORTGAGE

  • Mortgage terms (length of mortgage) – Home mortgages are generally available in 15, 20 or 30 year terms. The most common is the 30 year mortgage because the longer the term, the lower the monthly payment. The shorter the mortgage term, the less you are going to pay over the life of the loan.
  • Balloon mortgages — These mortgages offer very low interest rates for a short period of time — often three to seven years. After the real estate market crashed several years ago, balloon mortgages are not commonplace and often not available at larger mortgage companies.

TYPES OF HOME LOANS / MORTGAGES

  • Conventional Loans — These mortgages typically require a slightly higher credit score and downpayment.   The term is usually 15 or 30 years with a fixed or variable interest rate.
  • Government-backed loans — These loans are sponsored by agencies such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) and offer special terms, including lower down payments or reduced interest rates to qualified buyers. Typically an FHA Loan will only require the buyer to have a 3.5% downpayment on their home or condo (versus a 5 to 20% downpayment with a conventional loan).

 

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