SteveHerndonLoans

 When you start shopping around for a mortgage lender you quickly discover that there are lots of different types of mortgages, each type with unique features, and some things to consider before signing on the dotted line.

 It starts with an analysis of your current situation – finances, family size, commute to work and other lifestyle considerations – and continues in to your future – where do you intend to be five years from now? How about 10 years from now?

 A mortgage is a product, just like a car. They each have features that should be weighed before making the final decision on which mortgage product is right for you…and why!

 Fixed Rate Mortgages

Lenders earn their money by charging interest on the amount you borrow for a home purchase. If you borrow $100,000, the lender charges a percentage on the outstanding balance you owe.

 A fixed rate mortgage sets the interest rate and locks it in. It never changes throughout the term of the loan. This provides peace of mind for many homeowners, especially when mortgage rates are on the rise. With a fixed rate mortgage, it doesn’t matter how high mortgage interest rates climb.

 Typically, a fixed rate mortgage has a term of five years to 30 years. Obviously, the longer the term, the smaller the monthly payment. Some lenders even offer a 40 year mortgage with extremely low monthly rates, but 40 years is a long, long time to be paying off a mortgage.

 Interest rates on fixed mortgages tend to be higher than on variable rate mortgages (see below) because the lender does lock in the rate for decades and that lender wants to ensure it gets its money’s worth.

Variable Rate Mortgage

There are variable rate mortgages to suit the needs of just about any home buyer. With variable rate mortgages the interest on the outstanding mortgage balance is adjusted up or down based on the prevailing interest at the time the variable rate mortgage “adjusts.”

 There are one-year variables, three-year variables, 5/1 variables – in general, there’s the right mortgage fit to suit your needs and plans today and tomorrow.

 Variables are locked in for a certain period of time, after which the interest rate adjusts up or down. In fact, if rates are lower, a variable rate mortgage may actually lower monthly payments until the next time the mortgage adjusts to prevailing rates.

 The percentage of interest increase is usually defined in a variable loan agreement. For example, a lender may be limited to a 2% increase in mortgage interest rate after three years of a three-year variable. This enables homeowners to plan their housing costs more effectively and accurately. (You know the best and worst case scenarios before your variable rate adjusts.)

 Because variable rate mortgages do adjust every year or three years or at some set time, the interest rates on these variables are lower than fixed rate mortgages – sometimes significantly lower. For example, a 30-year fixed mortgage is available at a 5.75% interest rate. A one-year variable – a mortgage that adjusts interest rate every 12 months – might be available for 4.25% and that makes a big difference in your monthly payments – at least for the first 12 months.

Jumbo Mortgages

Jumbos are mortgages usually in excess of $417,000 to $500,000 and above.

 These mortgages are designed for the purchase of larger homes by homebuyers with proven mortgage payment histories, equity in their existing homes, impeccable credit records and sufficient incomes to ensure those large monthly payments.

 Jumbo mortgages are designed for homeowners who plan to sell their current homes and reinvest the profits from those sales into larger or more expensive homes.

Non-Owner Occupied

Most residential mortgages are for homes that are owner occupied – the mortgagee (that’s you) lives in the property that backs up the loan. Professional property investors require a non-owner occupied mortgage loan to finance their investments in property.

 These loans usually come with a higher interest rate based on the higher risk assumed by the lender.

Reverse Mortgages

Many home owners are “real estate rich” but cash poor. Their home mortgages are paid in full, they own a $300,000 home but they have no way of using that $300,000 to live day to day.

 A reverse mortgage is designed to address this problem. Home owners, over the age of 62 and who own their houses outright, receive monthly payments from a lender. These payments are, in effect, loans made monthly to the homeowners so they can stay in the homes where they’ve lived for decades.

 Reverse mortgages are growing in popularity as the Baby Boomer Generation moves into its retirement years. Reverse mortgages supplement Social Security and investment income, enabling senior citizens to truly enjoy their Golden Years.

 With a reverse mortgage, homeowners can live in the home for as long as they want or can. At which point, the home is sold, the lender receives repayment for the monthly payments it made to the home owners for 20 years, and any leftover profit goes to the homeowners.

 So, it doesn’t matter if you’re a young home buyer just learning about mortgage options, or you’re a long-time homeowner who’s finding it difficult to keep up with rising costs (and they’re always rising).

 There’s the right mortgage to suit your family’s needs now and well into the future. Talk to a mortgage professional. Ask questions. Ask to hear the pros and cons of each type of mortgage.

 Educate yourself on the types of mortgages available and choose wisely. An educated mortgage consumer is a smart mortgage consumer.

 You’ll be living with that loan agreement for years. Be smart when it comes to securing a mortgage.