Bill Gatton asked:




Your home is most probably the largest investment you will make during the entire course of your life. Home mortgage loans are most often the largest financial decision a person ever makes. It is important to fully understand how mortgages work and their component terms. Failure to do so can prove quite costly.

The first component is the duration of the loan. Mortgages most often have thirty year pay back periods. However, some newer exotic mortgages allowed for extension of this timeframe to up to fifty years. The long the loan term means the slower you are paying towards principal balance. This can prove risky. It is advised you stick with a 30 year term, and if you can afford the payment then seek a 25 year term.

The next important facet of a mortgage is its associated interest rate. Interest rates for mortgages are generally tied to a prevailing market rate. If you have good credit this rate tends to be lower. Also, a higher down payment can translate to a lower rate. It is important to seek the lowest rate possible. Even a tiny bit lower rate can translate to significant savings over the long course of the loan.

Some interest rates are fixed. This means the initial rate you have stays the same and never changes. This allows for effective family budgeting knowing exactly how much your housing expense will be on a continuing basis. The fact that is fixed doesn’t mean that you are stuck with it forever. At some point in the future if rates decrease it could be possible to refinance and thus lower your rate.

Other mortgages have what is called “adjustable rates”. These mortgages have interest rates which fluctuate with the benchmark rate. Most often, they go significantly up from the initial rate you are given. Many borrowers are confused and think their adjustable rate loan is actually fixed. It is imperative you know for sure which yours is. If you unknowingly have an adjustable rate you could be in for a rude surprise which is best avoided.

Some loans have what are called “teaser” rates. You are well served not to be teased in by these. The initial monthly payment amount on these mortgages are very low. That is the bait. Once they hook you, then the payment amount can radically increase. Many times so much so the borrower can no longer afford it. This is obviously a predicament you do not desire to find yourself in.

Some mortgages have various fees and other charges termed “points”. Many borrowers focus solely on the interest rate and fail to take into consideration these fees and points. Make sure you read all the fine print. See exactly what charges are levied at closing. High points or fees can wipe out an otherwise attractive interest rate.

Home mortgage loans can be confusing. If you don’t understand a clause then ask. If you still don’t understand, then ask again. Pay attention to the duration, the interest rate and ensure you understand if your rate is fixed or adjustable. Avoid high fees or points owed at closing. These simple steps can save you thousands over the time you own your home.

Louis

Loan Modification Help Center asked:


Everyday we read about the worldwide financial crisis and, specifically, about the U.S. banking and housing crisis.  To understand the challenges facing borrowers during the Housing crisis, it is critical to understand adjustable rate mortgages – how they work and how they can impact you. 

ARMs offer both advantages and disadvantages. Unlike a fixed-rate mortgage, an ARM provides interest rates that change periodically – and payments that go up or down accordingly.  At first, lenders generally charge lower interest rates for ARMs and this makes an ARM easier to afford initially.  If interest rates remain steady or move lower, this can work to your long term advantage. It is important, however, to weigh the risk that if interest rates increase in the future, so will your monthly payments. 

The initial rate and payment on an ARM will remain in effect for a limited period–ranging from several months to 5 years or more. After this initial period, the interest rate and monthly payment may change at regular intervals – every month, every year, every 3 years.   This period between rate changes is called the adjustment period.

The interest rate on an ARM is determined by two things: the index and the margin. The index is usually a standard measure of interest rates and the margin is an extra amount that the lender adds. If the index rate goes up, so does your interest rate and monthly payment.  On the other hand, if the index rate goes down, your monthly payment may go down. Not all ARMs adjust downward, however so be sure to read the details about any loan you are considering. 

Lenders base ARM rates on a variety of indexes. You should ask what index will be used for your ARM, how it has fluctuated in the past, and where it is published.  

The margin may differ from one lender to another, but it is usually constant over the life of the loan. The fully indexed rate is equal to the margin plus the index. For example, if the lender uses an index that is currently 4% and adds a 3% margin, the fully indexed rate would be 7%.

Some lenders base the amount of the margin on your credit record – the better your credit, the lower the margin. In comparing ARMs, look at both the index and margin for each program.

An interest-rate cap places a limit on the amount your interest rate can increase. Interest caps come in two forms: A periodic adjustment cap, which limits the amount the interest rate can be adjusted up or down from one adjustment period to the next, and a lifetime cap, which limits the interest-rate increase over the life of the loan.  By law, virtually all ARMs must have a lifetime cap.

In addition to interest-rate caps, many ARMs limit, or cap, the amount your monthly payment may increase at each adjustment.  A payment cap can limit the increase to your monthly payments but also can add to the amount you owe on the loan. This is called negative amortization.

If you are considering an ARM, ask yourself: 

– Is my income enough–or likely to rise enough–to cover higher mortgage payments if interest rates go up? – Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future? – How long do I plan to own this home? If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time. – Do I plan to make any additional payments or pay the loan off early?

 

Golden Rule:  Before you consider any loan, ask questions and read the details. For information and news please visit Loan Modification Help Center



CORNELL