What is a mortgage?
A mortgage is a document signed by a borrower when purchasing a new home. It allows the lender the right to take possession of the property if the borrower fails to pay the loan.
Types of Mortgage Loans
A mortgage is categorized as either a fixed-rate mortgage or an adjustable-rate mortgage. It is important to differentiate between the two options. One may serve your financial situation much better than the other.
Adjustable Rate Mortgage
An adjustable-rate mortgage (also known as an ARM or variable-rate mortgage) fluctuates in interest rate depending on market conditions. Initially, the interest rate of an adjustable-rate mortgage may be lower than the interest rate of a fixed-rate mortgage. However, it can fluctuate and be very unpredictable.
For this reason, adjustable-rate mortgages normally have a set minimum and maximum rate over the life of the loan. They also have limits or “caps” on how much the rate can move during each adjustment period. 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 increases. If interest rates rapidly rise, your payment will also rise but not beyond the set maximum limit.
Your payment schedule is based on an assumed payment plan of anywhere between 15 to 50 years. Often the rate is fixed for an initial period, and then the interest rate is adjusted more frequently thereafter. Depending on the mortgage option you choose, the initial period can range from 6 months to 10 years, with future adjustment periods occurring weekly to annually. There are many options with adjustable-rate mortgages. It is important to make sure you understand how your payments can change.
Why is an adjustable-rate mortgage (ARM) right for me?
Adjustable-rate loans are most appropriate if you plan on selling your house within a couple of years or if you expect your income to improve in the years ahead. If you choose an adjustable-rate mortgage, you should be in regular contact with a mortgage advisor as you come within 6 months of an adjustment period.
Fixed-rate Mortgage
A fixed-rate mortgage has the same “fixed” rate throughout the life of the loan. The monthly principal and interest payments do not change. The best time to obtain a fixed-rate mortgage is when mortgage rates are experiencing periodic lows. A fixed-rate mortgage can potentially lock you into a great rate for the entire life of the loan.
Why is a fixed-rate mortgage right for me?
A fixed-rate mortgage is usually the best option for people who enjoy stability and do not wish to experience the stress of principal and interest payment changes that are part of adjustable-rate mortgages.
This type of loan is appropriate if you plan on being in your home for a long period of time or if you expect minimal changes to your income situation.
Fees
With many variables surrounding a home mortgage, it is a smart decision to shop around. Your home will most likely be your largest purchase, so take the time to make an educated decision that will be beneficial for years to come.
| One-time Fees |
Loan Origination Fee / Points / Discount Points
1 point = 1% of the loan amount
Points are equal to lending fees. If you pay 1 point on a $100,000 mortgage, it will cost you $1,000. Each point paid on a 30-year loan typically lowers the interest rate by 0.125 percent, which means a 7.5% rate would be lowered to a 7.375% rate for the payment of one point. |
| Interest Rate Buy-Down |
An interest rate buy-down is a fee paid to lower your interest rate for a period of time, which in turn lowers your monthly payment. If you expect your income to increase over time, this option can be helpful during the early years of your mortgage. |
| Broker Fees |
A broker makes money by acting as the middleman between you and a potential lender. An advantage to using a broker is that they have access to many lenders’ programs.
There are a variety of ways that a broker can make money in facilitating your transaction. If you use a broker you should always ask for this information. Certain brokers, known as Up Front Mortgage Brokers, charge a flat fee for their guidance and may obtain this fee from either the lender, a direct payment from you, or a combination of both. |
| Attorneys Fees |
The lender that provides your mortgage loan will hire an attorney to represent their interests at closing. These fees will be passed on to you for payment. This fee can range from $0 to $700.
We at Aura Mortgage Advisors strongly encourage you to obtain an attorney to represent your interests and explain complicated documents to you at closing. |
| Other Fees |
There are many other fees and closing costs that you will pay when you close your loan. Every lender or broker should be able to give you an overall estimate of these fees. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. Because several items may be lumped into one fee, ask for an explanation of any fee you do not understand. |
You are required to pay all of these fees when you close on your loan. You should pay them with savings you have on hand. If you do not have sufficient cash available, sometimes you can include these fees in your total loan amount. However, this option will increase your total overall borrowing costs and may increase your interest rate as well.
Your Aura Mortgage Advisor can provide you with a work sheet that is prepared by the Federal Government to help you in shopping and in choosing the best mortgage loan possible.
Escrows
In addition to your mortgage loan payment, there are other bills that you have to payo own a home. They can include:
- Real estate taxes
- Homeowners’ insurance
- Flood insurance
- Lender’s insurance, also known as Private Mortgage Insurance or PMI
Typically, the lender requires that these bills be paid for directly by the lender in order to ensure the bills are paid in a timely manner. Lenders do this by collecting premiums from you, the borrower, on a monthly basis when you pay your principal and interest payment.
At your loan closing, you will be required to pay a couple months of these premiums up front. These funds will be placed into an “escrow” account for you until the bills are due. With both fixed-rate and adjustable-rate mortgages, the amount the lender needs to collect monthly will change as your taxes and homeowners’ insurance change. Lenders will send you a notice of an upcoming escrow payment change a few months in advance of the payment due date in order to give you time to adjust your family budget.
Specialty Products
Within the broad context of fixed-rate and adjustable-rate mortgages (ARM), there are a number of product variations. We will cover only the most common mortgage options here.
- In today’s mortgage market there are a number of products available to homeowners that offer great flexibility but an incredible amount of risk. Below is a list of a few types of these loans:
Interest Only ARMs (IO)
- Option Payment ARM
- Balloon Mortgage
We at Aura Mortgage Advisors want to emphasize that these products carry great risk, in that your monthly payment can increase greatly and rapidly. You may find that you are unable to meet your monthly financial obligations, which can result in the loss of your home. If someone suggests one of these types of products to you, it is very important that you seek the advice of an independent advisor who you trust and who understands mortgage products.
Note: Do not be afraid to ask your mortgage broker how long he or she has been in the mortgage business. If the broker is relatively new, you may want to seek a second opinion. |
