The modern mortgage market offers a variety of mortgage loans catering to the needs of homebuyers. The titles and details of these plans can become confusing, especially as new programs are introduced continuously. You can’t always make sense of these loan types, however, if you understand the basic principles that govern all mortgage loans, you will feel more confident when you choose the right loan for you. Remember, you can look to your real estate professional for assistance.
Basic Principles of all Mortgage Loans
- The home is used as security to back up the loan. A lender can foreclose on a home if the borrower defaults by failing to make scheduled payments.
- The larger the loan – compared to the value of the home, the more risky it is for the lender and, often, the more expensive the loan will be.
- Interest earned by the lender always is equal to the periodic interest rate times the outstanding principal balance of the loan. This periodic interest rate is the annual interest rate divided by the number of payments in the year (usually one per month).
- The required payment usually is a bit larger than the interest rate due so that some of the loan principal is repaid with each payment. This process is called Amortization and is why most mortgage loans can be retired when all the monthly payments have been made.
All mortgage loans have one of the following features:
- Fixed payment and fixed interest rate – Fixed rate mortgages
- Fixed rate but variable payment – Graduated payment mortgages
- Variable rate and variable payment – Adjustable rate mortgage
As you learn more about the types of financing available, you notice that some loans appear to have more favorable terms. That may indicate that those loans are, indeed, bargains (and it does pay to shop around), but usually it means that those loans could have some feature that is less appealing to borrowers. For example, short-term loans often have slightly lower interest rates compared to long-term loans. However, the monthly payment for the same amount of principal may be higher because of the shorter term. Variable rate loans usually have much lower interest rates in the beginning, only to compensate for the risk the borrower accepts as the interest rates will rise in the future.
If this article did not help answer you questions…that’s okay! Because I work with the best lenders in real estate and their job is to help you understand the program that best fits your situation. When you are ready, I would be happy to personally introduce you a couple of them.
Remember, it’s ALWAYS recommended to get at least two comparisons when shopping for a loan. We want this process to be a positive one and I will be by your side the entire way!
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