What Is A Mortgage
April 8th, 2014
We’ve been blogging about mortgage trends, preparing to apply for mortgages, investment mortgage options, but we realized we’ve never done an introductory post. So, what is a mortgage?
A home mortgage is something that allows you to buy a house even if you do not have enough money to pay for it right away. This is made possible by borrowing money from someone and paying it back in monthly installments. The person who lends you money is called the home mortgage lender. The home mortgage lender lends you money for a specific period (up to 30 years) during which you are expected to pay back the money in monthly installments. There are certain terms and conditions associated with the home mortgage agreement and these terms and conditions govern the home mortgage throughout its tenure. The most common agreement talked about is the interest rate that the home mortgage lender charges you.
Interest charges are the means through which the mortgage lenders earns on this financial transaction called home mortgage. Most home mortgage lenders offer various home mortgage schemes/options. The most important variation in these schemes is in terms of the interest rate and the calculations related to it. In fact, most home mortgage options are named after the type of interest rate used for that option.
Broadly speaking, there are two types of home mortgage interest rates
- FRM (fixed rate mortgage)
- ARM (adjustable rate mortgage)
For FRM, the interest rate is fixed for the entire tenure of the home mortgage loan. For ARM, the home mortgage rate changes or adjusts throughout the tenure of the home mortgage. This change or adjustment of mortgage rates is based on a pre-selected financial index like treasury security (and on the terms and conditions agreed between you and the mortgage lender). That is how mortgage works.
No matter what type of home mortgage you go for, you always need to pay back the entire home mortgage loan (with interest) to the mortgage lender. Failing to pay back the mortgage lender can result in foreclosure on your home and the mortgage lender can even auction it off to recover the remaining debt.
And now some tips on how to use low mortgage rate market to reap maximum benefits:
- Mortgage rates fluctuate frequently. But that does not mean that as soon as you find a low mortgage rate, you lock it immediately. You need to keep in mind other costs of mortgage along with your monthly payment.
- You can save a lot of money in the low mortgage rate market by opting for 15-year mortgage terms. It has a higher monthly payment but lower overall interest rate. Also, you will be charged interest over 15 years instead of 30, so you can see how that could add up.
- For buyers who have irregular income, it is suggested that you opt for a 30 year fixed rate mortgage loan. When the monthly payments are fixed you will have lesser problems to adjust your budget and will not require refinancing your mortgage.
- If you have an existing mortgage loan with the rate of interest higher than the current low mortgage rate market, then you can plan to take a mortgage refinance loan. Taking a refinance loan with low mortgage rate will help you reduce your monthly payments and total cash outlay on interest payment.
- Low mortgage rate will vary according to the nature of the refinance loan you opt for. By nature we mean whether it is fixed rate refinance loan or an adjustable rate refinance loan. Before refinancing you have to keep in mind the current national fees, the income and your expected income in the years to come, how long you intend to live in the house, etc.
- It is advisable to refinance with a low fixed interest rate when the mortgage rates are low, but expected to rise in future if you have an existing adjustable rate mortgage. Unlike variable mortgage rate that starts out low but then can rise quite high, the fixed mortgage loan will remain constant.
- If you are a first time buyer, the best time to get a home is when the mortgage rates are at their lowest. Accumulate as much as you can for your down payments and extra fees to secure low mortgage rate. -Summer is the busiest time of the year for the real estate market so there are a lot of buyers and competition. Therefore, in order to avail low mortgage rate winter is a better time, as there is less competition.
Talk to a reputable loan officer. They spend a lot of time each week studying mortgage interest rates, government trends, and forecasts. They’ll be able to answer your questions and look at what’s the best option for your personal situation.