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Home > Mortgage Types

Mortgage Loans – Sorting Out the Options

Going in search of a mortgage loan can lead you into a very tangled thicket.  There are literally scores of loan configurations and many of them are complicated beyond measure.  There is fine print that it often takes a professional in the industry to understand, and explain.  There are also plenty of misleading ads, online and on TV, promising large loans for minimal payments and leaving it up to you to find the traps.

For that reason, online sites such as this one can provide, if nothing else, a thorough education in mortgage loan basics.  You can also elicit a selection of loan options through an online source and look them over at your leisure.  When it’s time, you can seek an expert opinion on what is best for you, which is determined by an assortment of life situations and decisions that you probably have no idea should be involved.

You can also go through a mortgage broker, and count on that person to be your mentor and to find the mortgage that is the best deal for you.  There is nothing like one-on-one communication, particularly when it comes to putting together something as complicated as a home purchase.  But there is no substitute for self-education – that’s the purpose of this article, and many others like it on Mortgage Lenders Plus.

Mortgage Loans and Credit

Your credit score is going to dictate the range of mortgage options that are open to you, and the level of interest rate for which you qualify.  For that reason, it is imperative that you go into the process having reduced your debt to the extent possible and cleaned up your credit reports, which are used to calculate your credit score.  Those credit reports are often inaccurate, most often containing outdated information.  Look them over and make sure they are current.

Fixed Rate Mortgage Loans

If your credit score is high enough – at some institutions 700, at others 720 – then you will qualify for a fixed rate mortgage loan.  That is the traditional standard loan, where you pay a fixed interest rate for the thirty year life of the loan.  These loans are also often 80/20 loans, which means that the borrower is putting up a 20% down payment on the home.  A twenty percent down payment also precludes the requirement of mortgage insurance, an additional cost required by the lender.  Since few of us have a hundred thousand in the bank set aside for a rainy day or a down payment, secondary loans known as “piggy back loans” have become popular.  These are shorter term loans that are provided with an adjustable interest rate, meant to cover the gap between the cash you have and the cash you need to make that down payment.

Some lending institutions think that borrowers need to have a history in the home buying market in order to qualify for a fixed rate loan.  However as the housing market continues to lose steam, competition may loosen this requirement among some of the lenders.  If your credit is good and you are looking for financial continuity with an unchanging mortgage payment, the fixed rate mortgage loan is a good option.

Adjustable Rate Mortgage Loans

The adjustable rate mortgage loan is a loan for the rest of us.  It is the only type of loan available for “subprime” borrowers – that is, any of us that don’t meet the credit score mark – and for people who need to finance more than eighty percent of the house.  The adjustable rate mortgage can also be a good financial decision for people whose careers are growing and who may be facing a mobile future.

An adjustable rate mortgage (ARM) maintains a low initial payment for an initial period – usually three, five or seven years.  These loans are known as 3/1; 5/1; and 7/1 ARMs.  The monthly payment then adjusts upward as the interest rate rises, and is adjusted annually based on a money market index.  A loan of this type can be a good bet for someone who is planning to move in five years – the low payments in a 5/1 will coincide nicely with a planned sale of the home.  People who want to buy the most expensive house within reach can extend that reach with an ARM.

How Large a Mortgage Loan Can I Afford?

From a mortgage lenders perspective, there are a few financial guidelines that usually come into play.  Your monthly housing costs should probably not exceed 32% of your gross monthly household income.  Housing costs include mortgage payments, insurance, taxes and utilities. 

Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments.  This is the reason for reducing credit card debt as much as possible before calling on the lending institution.  While these formulas are no longer hard and fast, a calculation of some sort regarding total indebtedness will come into play.  The less you owe, the more you can borrow – and at better terms.

From your perspective, other factors are going to include the cost of assembling the down payment and the eventual impact of an ARM when the monthly payment adjusts.  It is important to consider the eventuality of an adjusted ARM payment, even if you intend to refinance or you plan to move and avoid the higher payment level.  Sometimes those plans don’t work out.

Most ARMs have interest caps, but the payments can climb steadily nonetheless.  The more exotic ARMs such as option ARMs and balloon payment loans carry risks of their own as well.  To some degree, affordability is a combination not only of how much you can afford to pay in the first month of the loan, but the amount of risk that you’re willing to take on as well.  That risk can be betting on a good refinancing rate in five or seven years, or on a seller’s market when it’s time to move, or on a growing household income.

Solving the Mortgage Loan Puzzle

There are no dumb questions when you are mortgage shopping.  Too many people sign on to mortgages they don’t understand.  Either they are dazzled by the new dream house or they don’t retain all the financial minutiae that is thrown at them, or the mortgage isn’t properly explained by the broker.  So maybe mortgages are like medicine – a second opinion makes sense.  That’s why we supply consulting services on this site, and why multiple mortgage options and home mortgage lenders work in partnership with us.  It’s the biggest investment most of us ever make – so keep asking until you’re sure it’s the right deal and it’s one that you fully understand.

1-year ARM Mortgage
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10-year Fixed Mortgage
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10/1 ARM
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15-year Fixed Mortgage
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15-year Jumbo Mortgage
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3/1 ARM
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3/1 Interest-only ARM
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30-year Fixed Mortgage
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30-year Jumbo Mortgage
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40-year Fixed Mortgage
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5/1 ARM
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5/1 Interest-only ARM
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5/1 Interest-only Jumbo ARM
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5/1 Jumbo ARM Mortgage
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7/1 ARM
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Adjustable Rate Mortgage
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Balloon Mortgages
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Fixed Rate Mortgage
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Home Improvement Loans
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Jumbo Mortgage Loans
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Mortgage Refinance Loans
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Option ARM Mortgage
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