Home Loans Articles

About Mortgage Loans

Learn about the types of home loans, their pros and cons, industry terms, and which mortgage is right for you.

If you are thinking about buying a new home, right now is a great time to do it. Mortgage rates are as low as they have been in recent years, and property values are continually climbing. If you are still renting a home or if you wish to invest in a second property, investing in a new mortgage can be a very intelligent decision.

What is a mortgage?

A mortgage is a document signed by the borrower when purchasing a new home. It gives the lender the right to take possession of the property if the borrower fails to pay the loan.

Types of mortgage

A mortgage can be either a fixed rate mortgage or an adjustable rate mortgage. It is important to differentiate between the two as one may serve your objectives much better than the other.

Adjustable rate mortgage

Also known as a variable rate mortgage, an adjustable rate mortgage fluctuates in interest rate depending on the market conditions. Initially, the interest rate is lower than a fixed-rate mortgage, but this interest rate can be unpredictable because no one knows how the market will perform. For this reason, adjustable-rate mortgages normally have a set minimum and maximum rate. If interest rates fall to extremely low levels, your payments will fall as well, but not beyond the set minimum limit. The same is true for rate spikes. If interest rates rapidly rise, your payment will rise, but not beyond the set maximum limit.

Fixed rate mortgage

A fixed rate mortgage has the same rate for the life of the loan, usually lasting 15-30 years. The best time to obtain a fixed rate mortgage is when mortgage rates are experiencing periodic lows and you wish to take advantage of the market. For this reason, a fixed-rate mortgage can lock you into a great rate for the life of the loan. Be aware, though, that if rates drop after you have signed the agreement, you are still locked into the initial rate. A fixed-rate mortgage is usually the best option for people who enjoy stability and do not wish to experience headaches from market fluctuation.

APR or Annual Percentage Rate

When we talk about APR, we assume it refers to the cost of credit, expressed at an annual rate. APR, along with the interest rate, does however include several other components:

Points: Points are lending fees, equal to 1 point = 1% of the loan amount. They are normally paid at the end of the loan in cash, although you may borrow the amount needed to pay the points at closing.
Broker fees: When taking out a mortgage, a broker is often involved in facilitating the borrowing. A broker is essentially the middleman between you and the bank, although this is not always disclosed. Brokers make money by connecting you to the actual lender; thus they indirectly get paid by you. A percentage of the APR you pay will go straight to the broker that made the loan possible.

Other Charges

Real estate taxes: The taxes you must pay on your property, instead of being lumped into one annual fee, are dispersed into a monthly fee charged by the lender.
Insurance: In order to protect against unforeseen circumstances, you must obtain insurance on your property.
Lender insurance: If you do not make a large enough down payment on your home, the lender will often take out insurance in case of loan default. This insurance gives the lender protection while increasing your monthly payment. After you have paid off a sufficient amount of the loan to the point where the risk of default has gone down, these lender insurance fees will be discontinued.

With the large amount of variables surrounding a home mortgage, it is a smart decision to shop around. Your home will most likely be your largest purchase, so taking the time to make an educated decision will be of benefit for years to come.