The adjustable-rate mortgage (ARM) is geared to homeowners who want to start with relatively low monthly payments.
ARMs come with interest rates that fluctuate over the life of the loan. For the first year or the first three years of the loan (depending on terms), ARMs begin with a relatively low interest rate tied to an index such as the federal government's cost of funds index. That index varies from month to month, according to economic indicators. On either the first- or third-year anniversary (depending on the agreement), the mortgage interest rate is reset based on fluctuations in the index.
Typically, the agreement states that at the maximum, the borrower's interest rate can climb 2 percent in any one year and 6 percent over the length of the loan. That maximum increase is known as the rate cap.
Because ARMs are usually fixed for one or three years, they appeal to owners who expect to live but a few years in their home.
Another form of ARM involves the two-step mortgage, in which the interest rate can be raised only once at the five- or seven-year mark.
Some borrowers might want to convert their ARM to a fixed-rate loan at some point. It's best up front to ask the lender if that's possible and if so, at what cost.
Fixed mortgageOne of the most prominent forms of mortgage payments is the fixed rate mortgage. Unlike the adjustable mortgage, the fixed rate mortgage lets a homeowner know exactly what his or her payments will be during the length of the loan, generally 15, 20, 25, or 30 years.
Experts generally say that the fixed rate is preferable to the adjustable rate if interest rates are low at the time the mortgage is taken out and if the owner expects to live in the house for at least several years.
Balloon loans carry a fixed interest rate, generally for 7 or 10 years, at the end of which the borrower must make a lump sum payment of the balance of the loan or lose the property.
Two federal government mortgage organizations help first time home buyers that are to benefit consumers are Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), which purchase bundles of home loans and sell them as securities to investors. Fannie Mae-approved lenders, for instance, are supposed to help consumers find the lowest cost mortgage for which they qualify. Both Fannie Mae and Freddie Mac have websites that detail their services.
However the mortgage is shaped, any mortgage transactions will require:
Appraisal - a professional appraiser inspects the appearance of the property and studies the condition of the neighborhood to determine the property's value and ensure that the property is a safe investment.
Escrow - Documents and money that are kept by a third party until contractual conditions are met by the parties involved in a sale of property.
Closing costs (also known as settlement costs) - Not included in the property's sale price, these are expenses that must be paid before title to the property is transferred to the new owner.
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This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions
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