Types of Mortgages

Shopping for your loan is one of the most important steps in the home buying process.  Mortgage brokers and lenders have a wide variety of mortgage products.  The type of loan product and your interest rate will not only influence your total settlement (closing) costs but will determine the amount of your monthly mortgage payment.

Two of the most common types of mortgage loans are fixed-rate mortgages and adjustable rate mortgages.  The interest rate on a fixed-rate mortgage will remain the same for the entire life of your loan.  Certainty is the primary benefit of a fixed-rate mortgage loan. You always know what your interest rate will be, regardless of what the economy does. The downside is that you will likely pay a premium for this predictability, in the form of a higher interest rate.  When a mortgage lender grants a fixed-rate loan for a long period of time (like 30 or 40 years), they take on a certain amount of risk. If the prime interest rate goes up during the life of your loan, you will not have to pay the difference — the lender will. This is why they charge a higher interest rate than with an adjustable-rate mortgage.   You have a number of options in a fixed rate loan – many lenders offer terms of 10, 15, 20, 30 and even 40 years.  The longer the loan period, the lower your payment will be.  However, a 30 or 40 year fixed rate loan will have much higher total interest paid over the life of the loan than a 15 year loan will have.

The interest rate on an adjustable rate mortgage (ARM) may adjust at regular intervals and may be tied to an economic index, such as a rate for Treasury securities.  When the interest rate on an ARM adjusts it may cause your payment to increase.  These days, most adjustable-rate mortgages start off with a fixed rate for an initial period of time, usually 3, 5 or 7 years. During this introductory period, the rate is fixed and will not change. After the introduction period, however, the loan converts to an adjustable-rate.

Overall, the interest rate on this type of home loan is lower than a traditional fixed-rate mortgage. The downside is that you can never predict the interest rate it will adjust to after the introductory period. So in this regard, you can think of the initial period as a reward for the uncertainty of the adjustable period. You will start off with a lower interest rate than a regular fixed-rate loan, but you have the uncertainty of the adjustment phase.

Some adjustable rate mortgages allow the borrower to pay either the “interest only” or less than the “interest only”.  In both options, none of the mortgage payment is applied towards the loan balance (principal).  In a less than “interest only” option, the unpaid interest is added to your loan balance and you can owe more than the amount you initially borrowed.  When the loan balance increases to the maximum amount the loan is “recast” and your loan payment may double or even triple.  When faced with “payment shock”, you may discover too late that the loan payments no longer fit within your budget and the loan is difficult to refinance.   You should carefully evaluate all the possible costs and what may happen to your mortgage payment off into the future when you are thinking of selecting an ARM loan.

Government Programs You may be eligible for a loan insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA) or offered by the Rural Housing Service (RHS).  These programs usually require a smaller down payment (less than 80%).  Ask your lender or mortgage broker about these programs.  You should shop and compare quotes from different lenders because each may offer different rates and loan terms.  If you are a first time homebuyer, ask your real estate agent/broker and loan originator about the availability of local or state programs such as reduction in transfer taxes, special income tax deductions or state homestead exemption discounts.

  • VA Loans: Veterans may qualify for a loan from the Veterans
    Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
  • FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase “FHA approved” when looking at ads for homes.  There may be specific requirements regarding the condition of the home and repairs needed with this type of loan.

You basically have two routes to finding the best rate and loan product. The first is to do all the research on your own. The second is to use a mortgage broker.

Do-It-Yourself: With the advent of the Internet, much information is readily available. Once you have educated yourself sufficiently about real estate loans, all it takes is the time and energy to sift through online resources to find the information you need.

Rates change quickly. That great rate you find today might not be there tomorrow. Once you find the rate you’re looking for, submit a loan application and lock in that rate.

Some sources for interest rates on the Internet include:

Lending Tree www.lendingtree.com

Quicken Loans www.quickenloans.com

Ditech Home Loans www.ditech.com

When comparing loans, make sure that you’re comparing apples to apples. Also be sure that you are comparing the same loan term (10, 15 or 30 years for example), and whether fixed or adjustable.  Be sure to ask the lender for a statement detailing all fees associated with the loan (called a Good Faith Estimate).  The lenders are legally required to provide you with this, and all Good Faith Estimates are set up in the same format to facilitate easy comparison.  Factors such as “points” (loan fees), interest rates, underwriting and appraisal fees can vary greatly from one lender to another.

Mortgage Brokers and Lenders: If you don’t have the time or experience to “do it yourself”, you should look for a qualified mortgage broker or lender.   Your choice of a mortgage broker or lender, as well as the type of loan itself, will influence your settlement costs and your monthly mortgage payment.  You may find a listing of local lenders and mortgage brokers on line or in the local yellow pages, and a listing of current rates in your local newspaper.  You can also ask friends and relatives who have refinanced or purchased recently if they have a broker they can recommend, or ask your qualified real estate professional at Cedar Creek Realty in Arnold, CA. You’ll want to find a broker who is knowledgeable about finance and loans and who has your best interests in mind.  Loan products are highly competitive in today’s market, so shop carefully and compare the “Good Faith Estimate” before you select a lender.

A loan originator is a lender or a mortgage broker.

Mortgage Brokers – Some companies, known as “mortgage brokers” offer to find you a mortgage lender willing to make you a loan.  A mortgage broker may operate as an independent business, and has access to a wide selection of lenders and loan products, depending on your individual needs.

Lenders – A lender typically makes loans to borrowers directly.  They receive payment through fees charged to you at settlement, payment from interest when you make your monthly mortgage payments and payments if they sell your loan or the servicing of your loan after settlement.  Whether you apply for a loan with a lender or mortgage broker, you should receive “Good Faith Estimates” of settlement costs from multiple loan originators to make certain you get the best loan product at the lowest interest rate and lowest settlement costs.