Whether you are looking for your first home or trying to save money by refinancing your current home the process of obtaining a mortgage can be scary especially if your not exactly sure you know what your doing. We’ve all heard the horror stories of people not realizing what they were getting themselves into and losing their homes because of it. Here are some questions that I am frequently asked that I will share to keep you from being one of those people.
What is an ARM?
Besides a very important part of the human body and ARM is a mortgage acronym that stands for Adjustable Rate Mortgage. The rate is generally fixed for a short term at the beginning of the loan, generally for the first 3,5, or 7 years of the loan and after that the rate adjusts to the current market rate as often as stated in the contract, usually annually. The reason people usually choose an ARM is a bet that rates are going to drop. An ARM usually offers a lower initial interest rate, someone choosing an ARM generally wants to take advantage of the initially low interest rate but intends to refinance at the end of the fixed period, or if they think rates will drop further they will take advantage of the rate adjustments while rates decline.
What is a Balloon?
A balloon is a short term loan that is amortized over a long period of time to get the borrower a low payment. For example a 100,000 loan could be set up as a 5 year balloon with a 30yr amortization. Lets say the payment is 500 per month. In this instance the borrower pays 500 per month for the first 59 months and the remaining loan balance is due in full on the due date for month 60. A balloon mortgage is usually used in a strategy where the borrower only intends to own a property for a short time or refinance quickly.
What is the most Stable Type of Mortgage Loan?
By far the most stable type of mortgage is the Fixed Rate Mortgage. They are most commonly offered in 30 and 15 year terms. The nice part of these loans is that the principal and interest payment is the same for the life of the loan so there are no surprises. This type of loan is preferred by most people who plan to stay in there home long term.
How can I make sure that I am not paying unnecessary closing costs?
All lenders are required by law to disclose the costs to you in writing, both at the time of application and at closing. At application they will give you a Good Faith Estimate of settlement costs, and at closing they will give you what is called a HUD-1 statement of settlement costs. Have your lender explain this to you and explain where the money is going for each line item. Common costs are Appraisal fees, Title insurance fees, Title search fees and flood certification fees.
I hope the answers to those questions help you out. I know that there are a lot more questions but the keys to getting a great mortgage are keep it simple and find a lender you trust.
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