Understanding Mortgages

Few people can afford to plunk down the chunk of money to pay for a house or piece of property outright. For most of us, the way we are able to purchase a house is with a mortgage. A mortgage is simply an instrument whereby a person can purchase a house or piece of real estate and pay for it over time. As with everything though, a mortgage doesn't come free. The person wanting money to purchase property is called the borrower.

The person or institution with the money to use is the lender. In a mortgage, the borrower agrees to pay the lender the amount borrowed plus a percentage (interest) to compensate the lender for the use of the money. Lenders can set up different types of mortgages, doing different things with the number of years the borrower has to pay the loan back (term), and different things with the interest. There are two basic types of interest, fixed and adjustable.

Fixed Vs Adjustable

A fixed rate loan is one in which the interest rate is "fixed" or stays at the same percentage for the life of the loan, no matter what interest rates are at a given point in time. The advantage is that you can count on your payment being the same month after month, year after year. It's very easy to budget you mortgage payment, there are no surprises.

An adjustable rate mortgage or ARM is a mortgage that has a fixed rate for a set period of time, 5 years is common, called a introductory period. After this set time, the rate is adjusted up or down to meet current rates, and adjusts at set times thereafter. The advantage of an ARM to the borrower is the lower introductory rate. ARM loans are ideal for borrowers that are not planning on staying in one place for more than a few years. They get the benefit of the lower rate, then can be out by the time a higher rate kicks in.

Term

The term of a mortgage is simply the length of time a borrower has agreed to take to pay back the loan. The term of the loan is critical with regard to the interest. Common terms for mortgages are 30 years and 15 years. A borrower can expect to pay a lower interest rate for a 30 year loan, but because it's twice as long, the total interest amount paid is more than would have been paid on a 15 year mortgage at a higher rate! Also, with a 15 year mortgage, you will build equity in your home faster, and obviously pay off the home sooner.

Special mortgages

If a borrower needs more than $417,000 (as of this writing), he will need what is known as a jumbo loan. A jumbo loan is one that exceeds the maximum limits set forth by Fannie Mae and Freddie Mac, the two organizations that have made it possible for many people to borrow money for mortgages. A jumbo loan will cost more in interest as the lender has a greater risk associated with a more expensive property in the case of a default. A sub prime mortgage is for borrowers that may have had trouble with their finances due to medical problems, divorce, or a bankruptcy. Again, the interest is higher due to the increased risk to the lender.

A quick search on the Internet can turn up literally thousands of lenders and brokers competing for your business. There is a mortgage out there for a borrower of just about any circumstance.

John G Phillips owns and operates http://www.mortgageserviceguide.com

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