Mortgage loans simplified

November 8, 2011 — You’ve found the home, and now it’s time to figure out how you’ll finance it. Here is some basic information to help get you started.

Fixed Rate Mortgages
For those who prefer no surprises, the fixed rate mortgage is a popular choice. The loan is based on an interest rate that stays the same throughout the life of the loan so you’ll always know how much you can expect to spend.

Adjustable Rate Mortgages (ARMs)
Some consumers prefer ARMs during times of increasing rates or when they don’t plan to stay in their home for more than a few years. Initially, ARMs allow you to take advantage of rates that are generally set below current fixed rates. In exchange for the discount, you share a portion of the risk that rates may change over time. Generally, the rate adjusts up or down as the economic indicator on which the loan is based rises or falls.

Jumbo Loans
Different from other loans, the jumbo loan is set up specifically to accommodate mortgage amounts in excess of $417,000, although this amount is reviewed annually and adjusted again on Oct. 1. Jumbo loans typically carry a higher-than-average risk to the lender. To make up for this risk, slightly higher interest rates may apply.

Balloon Mortgages
Payments are calculated on a longer term (15-30 years) for balloon mortgages, with the agreement that the mortgage be paid in full with a balloon payment at the end of a predetermined period, generally five to seven years. The advantage of this loan is that interest rates are generally set below current market rates. Many balloon mortgage borrowers, however, refinance their loan before the balloon payment is due.

This type of loan is popular for those who intend to resell their home before the balloon term is over because they may be able to save money paying the reduced rate.

Two-Step Loans
Two-steps are ARMs that have only one adjustment during the loan term. They let you take advantage of a reduced start rate of an ARM while still enjoying the security of a fixed rate for some time. The adjustment does not usually occur until several years into the loan term, so two-steps are particularly attractive to buyers who do not plan to stay in their new home for more than a few years.

The Term: In Easy Terms
In short, the term is the length of your loan. Usually, terms are 15 or 30 years, each with its own benefits. A shorter term carries a lower rate and higher monthly payments, but more money is saved over the long run while you build equity at a faster pace. A longer term carries a higher interest rate and a lower monthly payment, so it makes a larger mortgage more affordable. However, you build equity at a slower rate. Other terms, such as 20 or 25 years, are often available, too, depending on the type of loan you select.

Contact your lending representative for more information about choosing the right loan for you.


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