’t afford to buy our new home outright, so we
save up a down payment and then work out an arrangement to
finance the balance. This arrangement is called a mortgage. You
agree to pay a set amount and use the house as collateral. If
you miss a certain number of payments, the bank has the right
to declare you in default of your mortgage and foreclose on
your property. You then lose everything you have invested plus
the house. To avoid such problems, it is important to get the
mortgage that fits your income.
There are many different kinds of mortgages. These include
fixed- and adjustable-rate mortgages. There are sub prime rates
for people with credit problems. There are also jumbo, balloon
and construction mortgages. The most common mortgages are fixed
rate mortgages where the borrower repays a fixed rate of
interest over a period of 20 or 30 years. The interest rate is
in effect for the life of your mortgage. The monthly payment
(including interest) is determined when the loan is made. It
does not change over time.
The adjustable rate mortgage (ARM) differs from the fixed rate
because the interest rates and monthly payments go up and down
depending on market interest rates. Hybrid ARMs usually include
a one or five year fixed interest rate. After that the interest
becomes that of the market place and the borrower’s monthly
payment goes up and down for the duration of the loan. There
are also ARMs where the borrower pays only the interest on the
loan for ten years. After that the borrower must pay the
current rate of interest. Some ARMs can be converted to fixed
rate mortgages for a fee. The good news is that there are caps
on the interest and payments due. Periodic caps limit prevent
interest rates from rising more than a certain number of
percentage points in any year. Lifetime caps limit how much the
interest rate can rise over the life of the loan. Payment caps
limit the amount the monthly payment can rise over the life of
the loan in dollars, rather than how much the rate can change
in percentage points.
Sub prime mortgages are for people with credit problems and
having a credit score of less than 620. They have higher
interest rates than do regular loans. Just how much higher
depends on the borrower’s credit score, size of down payment,
and what types of delinquencies the borrower has in the recent
past. Sub prime loans can have a prepayment penalty if the loan
is paid off early. They can also include a balloon payment. In
this type of loan, the borrower is required to pay off the
balance of the loan in full after a specified period has
passed. If the borrower can’t pay the entire amount, he/she has
to refinance the loan or sell the house.
There are other types of loans. The jumbo loan is higher than
most loans and allows you to buy a more expensive house. The
downside is that you pay a higher interest rate than normal.
Two-step mortgages have a fixed rate and payment for an initial
period, one adjustment of interest rates and then a fixed rate
and payment for the remainder of the loan.
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