• Secrets of Real Estate Investment
• Adding Value to Your Home
• House Selling Tips
• Selecting A Mortgage
• Steps to Buying a Home
• Save Money on Insurance

Selecting A Mortgage

There are several factors that go into selecting a mortgage. Besides looking at a low interest rate, one must take into consideration factors such as income, savings, expenses, cash reserves and debts all of which represent your true financial position. Selecting the best mortgage would mean a good balance of your mortgage options with your financial constraints as well as your housing needs in the short term as well as the long term.

Selecting a mortgage can be quite frustrating and time-consuming. There are several loan packages, offered by different lenders that include diverse interest rates, up-front costs, and fine print terms, all of which can change frequently. You need to investigate and research thoroughly in order to get a mortgage loan that best fits your needs at a competitive price.

Although there are several types of mortgages available in the market today, even the one with the shortest duration will last around 12-15 years. Thus, one must objectively evaluate the duration of stay, the potential rise or fall of income as well as the likelihood of any untoward expenses that may arise in the near future. Planning for all contingencies will help you to determine and thus select a mortgage loan that’s best for you.

The next thing you need to take into account is the risk associated with different types of mortgage loans, mortgage rates, interest and the principle amounts you will have to pay as well as the duration of the loan. Typically the shorter the loan, higher the installments are likely to be. Another important element is that of the costs - direct, indirect and incidental that are inevitably a part and parcel of all mortgages.

However, what will also play a large influence on your decision making is your mortgage lender who approves of your application. He will, based on your credit rating and other mortgage calculations offer you a loan that will cover all risks. He will adjust mortgage rates and payment schedules after evaluating your financial position. Keeping all these factors in mind, you will be in a position to determine which mortgage loan is best for you.

There are number of mortgages available in the market today. The most common among them are fixed, adjustable, graduated payment and balloon mortgage among others. The challenge is to select a mortgage loan that suits your needs, financial constraints as well as market conditions.

Fixed Rate Mortgages (FRM) – As the name suggests, in this, the principle as well as the mortgage interest remains fixed throughout the term of this mortgage loan. This holds true irrespective of the fact that mortgage rates may fluctuate during the tenure of the loan. This is the most common and popularly chosen mortgage with people who are averse to risk and favor predictability. You have the choice, to prepay the amount and decrease the balance if your income rises without having to worry about an increase in the interest rate. A higher initial interest rate with an FRM also means that you need to be in a higher income bracket to qualify.

There are several government backed mortgage loan programs offering fixed rate mortgages:

• Federal Housing Administration Insured Loans (FHA)
• Veterans Administration (VA)
• Farmers Home Administration Loans (FmHA)

Adjustable Rate Mortgages (ARM) – This type of mortgage loan is fixed or variable wherein the mortgage rate will fluctuate as per the market conditions during the tenure of the loan. The higher the interest rate, the higher your payments will be and vice versa. It is thus most suited for those planning to move or refinance in a span of 3-4 years. With ARM you pay a lower interest rate at the outset of the loan and hence can qualify even if you are in a lower income bracket as well as pay a lower monthly installment. To avoid too many fluctuations in interest rates, you can set a cap on how much the interest rate and/or payments can change during the period of the loan.

Graduated Payment Mortgage (GPM) – This type of mortgage loan offers a fixed interest rate with low monthly payments in the early years which rise after a pre-determined period of about 5-10 years. They then tend to stay constant during the term of the loan. The interest rate is also less in the initial period but increases in later years.

Balloon Mortgage – This mortgage is amortized over a 30 year period wherein the borrower makes payments for only the first 3-5 years. After this, the balance payment is paid in one large installment. If this balloon balance is unable to be paid back, then the borrower will have to resort to refinancing.

When looking for a mortgage, it is essential to be aware of some basic things like understanding the market volatility, interest fluctuations, duration of the mortgage loan, lock-in, etc. Ensure that all agreements with your mortgage lender are in writing and all fess hidden or otherwise are told to you upfront. Although there are several types of mortgages in the market today, choosing the one best for you is critical. If you fail to make your monthly installments or interest payments, you will need to refinance your mortgage. So ensure that you have done your homework as regards your goals and financial position and your needs to choose the mortgage that’s best for you.