By: First Union
Understanding Mortgage Rates
Most people when buying a house will take out a mortgage to pay for most or part of the home. The mortgage process can be lengthy and does involve submitting quite a bit of paperwork to the lender with whom you're working. There are several things that homeowners need to pay attention to when it comes to their mortgage. Perhaps one of the main concerns of those looking to procure a mortgage is the mortgage rates. Mortgage rates in part determine the total cost of the loan that you are borrowing for your property purchase. In this article, we look closer at mortgage rates in conjunction with the various types of mortgages that are available to homeowners.
When getting a mortgage, you will pay off the balance based on what is called an amortization schedule. This shows you precisely how much you will be paying each month, how many months you will be paying on that loan, and also, how much of the payment goes toward principal and how much toward interest. The mortgage rate at which you get the loan will determine how much interest you pay over the life of your loan.
Keep in mind, there are several different types of mortgages that you can apply for, and depending on which you opt to go, how you pay interest and the amount of interest paid could vary. For example, if you are getting a fixed-rate loan that lasts for 30 years, you will be paying an equal amount every single month; however, the amount that is applied toward interest will decrease as the loan matures and more of your payment gets applied to principal.
The loan term, or the length of the loan repayment period, will ultimately determine your monthly payments. So the longer the term, the lower each monthly payment will be. This however also means that you are usually paying more over the life of the loan as you will be paying interest for a longer period. Let's take a look at some of the different home loan options available.
With a fixed-rate mortgage, the mortgage rates that you pay will be locked in. In other words, versus an adjustable-rate mortgage, the total interest owed will not change. Your monthly payments with a fixed-rate loan will also remain the same. The typical fixed-rate mortgage is generally a thirty-year mortgage, though some people do opt for shorter-term loans, so anywhere from a 10 to 20-year mortgage is possible as well. Again, the shorter the loan period, the less you will be paying in interest over the life of the loan.
Also referred to as ARMs, adjustable rates mortgages, as the name suggests, do have fluctuating interest rates and how they fluctuate will depend on the terms of your specific ARM. With this kind of loan, the interest rate is not locked in for the life of the loan. The good news is that with most ARMs, there is a cap as to how much the interest rate can fluctuate, there are also limits when it comes to how often the mortgage rates can change. As the rate goes up and/or down, your monthly payment gets recalculated. This then will represent the monthly amount to be paid until the next relevant mortgage rate change. An ARM is similar to a fixed-rate mortgage in that a certain portion will be applied to the principal and a certain amount to interest.
Keep in mind, that even though initially the mortgage rates for ARMs may seem lower, they are bound to increase as the loan matures. Some lenders will offer what is known as a teaser rate for the first year and then this of course will change. With an ARM, rates can sometimes fluctuate as much as every year depending on your specific terms. If the goal is to purchase the home and only stay in it a short while, then an ARM may be the best way to go versus a traditional fixed-rate mortgage.
Interest Only Loans
There are other loan options beyond just a fixed-rate mortgage or an ARM. An interest-only loan is one such option. This, however, is rarer than the other two, and usually, only wealthier home buyers will go for an interest-only mortgage. Basically, with this mortgage, for the first few years of the loan, you will only be making payments on interest. This then will effectively result in a lower monthly payment than if you were to pay on both principal and interest. Again, this type of mortgage could make sense if you plan to only stay in the home for a short period. Keep in mind too, that by only paying on the interest you are not building up equity in the property.
When applying for a jumbo mortgage, you are usually doing so because the loan amount required is over the traditional mortgage limits. In certain areas of the country, the limit can be as high as 820k. If the amount required exceeds this then you may have to apply for a jumbo loan. These can be both fixed and adjustable as far as mortgage rates go. With a jumbo mortgage, the interest rates do tend to be higher than with a smaller mortgage amount.
Additional Mortgage Loan Costs
Whatever type of home loan you decide to apply for, you do have to remember that there are other monthly costs associated with just the principal and interest payments you will be making. Some of the associated costs that you need to keep in mind when figuring your monthly payments: taxes and insurance. Many lenders do require you to roll both tax and homeowner's insurance payments into your monthly loan payments. This of course will result in a higher payment than you might have anticipated. If you live in an area that requires an HOA, this is also going to be part of your monthly expense when it comes to the cost of purchasing your home. You want to make sure you have a clear picture of exactly what you need to pay before purchasing your house.