When someone purchases a home, one of the most confusing and
frightening aspects of the experience is getting a mortgage. There are
so many different types, and so much confusing terminology.
There are 2 types of mortgages that most home buyers acquire: fixed rate; and variable rate. Historically, variable rate mortgages begin with a lower rate, and that rate is adjusted periodically, pegged to some economic index, such as Treasury bonds, etc., while fixed rate mortgages maintain the same rate throughout the term of the mortgage. However, in periods of very low interest rates, such as have existed for the past several years, there is very little rate difference between fixed and variable mortgages, and there may even be times that fixed rates are lower.
You may have read about the rate of a mortgage with points, or without. A point is an amount that one pays to lower the rate during the rest of the term of the mortgage. It is a "trade off" of paying more upfront to pay less on a monthly basis. One point equals 1% of the amount of the mortgage, so paying 1 point on a $300,000 mortgage would mean paying $3,000 up front to receive a lower monthly rate. In order to see if paying the "points" is beneficial, one must calculate the amount of savings per month, how much it would save over the term of the mortgage, and the opportunity value of the dollar amounts of the points. It is also important to understand that it might be necessary to pay "points" in order to bring the monthly carrying charge down, in order to qualify for the percentage qualifications that lending institutions use as a factor in determining qualification for the mortgage.
Mortgages also come in a variety of lengths. Most common fixed rate mortgages are: 15 year; 20 year; 25 year; 30 year; and 40 year. The shorter the term, usually the lower the rate paid, but since there is also a shorter repayment period, the monthly carrying charge may be significantly higher. Obviously, the shorter the term, the lower the total amount of payments. Not all individuals will be eligible for some of the shorter terms, because the higher monthly carrying charge would require a higher income for approval. If someone wants to pay off a mortgage in a shorter period of time, most mortgages today have no prepayment penalty (Years ago, many more did). Adding a small amount to one's monthly payment voluntarily will reduce the term (number of years needed to repay) of the mortgage significantly. Following this approach, also has the advantage that the "required" monthly payment is lower than in the shorter term mortgages.
If one wishes to qualify for a mortgage, it is very important to make sure that one has a fairly pristine credit report, and a relatively high credit scores. In today's economic climate, most lending institutions will normally exclude anyone whose credit score (e.g. FICO) is not around 700, or higher. It is also not uncommon for different rates to be offered, dependent upon one's credit score, and thus, the higher the score, the lower the rate (the best rate generally requires/ necessitates a 750 or higher score), Before applying for a mortgage, one should request a free copy of their credit report, and if there are any inaccuracies, fix them. If there are any potential problems, it is essential to "fix" your credit before going for a mortgage. Lending institutions today are far more careful and cautious than they have been in the past.
There are 2 types of mortgages that most home buyers acquire: fixed rate; and variable rate. Historically, variable rate mortgages begin with a lower rate, and that rate is adjusted periodically, pegged to some economic index, such as Treasury bonds, etc., while fixed rate mortgages maintain the same rate throughout the term of the mortgage. However, in periods of very low interest rates, such as have existed for the past several years, there is very little rate difference between fixed and variable mortgages, and there may even be times that fixed rates are lower.
You may have read about the rate of a mortgage with points, or without. A point is an amount that one pays to lower the rate during the rest of the term of the mortgage. It is a "trade off" of paying more upfront to pay less on a monthly basis. One point equals 1% of the amount of the mortgage, so paying 1 point on a $300,000 mortgage would mean paying $3,000 up front to receive a lower monthly rate. In order to see if paying the "points" is beneficial, one must calculate the amount of savings per month, how much it would save over the term of the mortgage, and the opportunity value of the dollar amounts of the points. It is also important to understand that it might be necessary to pay "points" in order to bring the monthly carrying charge down, in order to qualify for the percentage qualifications that lending institutions use as a factor in determining qualification for the mortgage.
Mortgages also come in a variety of lengths. Most common fixed rate mortgages are: 15 year; 20 year; 25 year; 30 year; and 40 year. The shorter the term, usually the lower the rate paid, but since there is also a shorter repayment period, the monthly carrying charge may be significantly higher. Obviously, the shorter the term, the lower the total amount of payments. Not all individuals will be eligible for some of the shorter terms, because the higher monthly carrying charge would require a higher income for approval. If someone wants to pay off a mortgage in a shorter period of time, most mortgages today have no prepayment penalty (Years ago, many more did). Adding a small amount to one's monthly payment voluntarily will reduce the term (number of years needed to repay) of the mortgage significantly. Following this approach, also has the advantage that the "required" monthly payment is lower than in the shorter term mortgages.
If one wishes to qualify for a mortgage, it is very important to make sure that one has a fairly pristine credit report, and a relatively high credit scores. In today's economic climate, most lending institutions will normally exclude anyone whose credit score (e.g. FICO) is not around 700, or higher. It is also not uncommon for different rates to be offered, dependent upon one's credit score, and thus, the higher the score, the lower the rate (the best rate generally requires/ necessitates a 750 or higher score), Before applying for a mortgage, one should request a free copy of their credit report, and if there are any inaccuracies, fix them. If there are any potential problems, it is essential to "fix" your credit before going for a mortgage. Lending institutions today are far more careful and cautious than they have been in the past.
Discuss the entire process, in advance, with your personal, real estate professional, as well as a quality mortgage adviser/ professional!
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