Types of Mortgages
When applying for a mortgage loan you should know what kind of mortgage would work best for you. Choosing the right mortgage depends on your circumstances. The two primary mortgages are Fixed Rate Mortgage and Adjustable Rate Mortgage. Understanding what sets them apart, as well as knowing their pros and cons, will help you make the best decision.
Fixed Rate Mortgage (FRM) — These keep your interest rate locked for the term of the loan. No matter what happens on a daily basis to the percentages, yours will always remain the same. Therefore, your monthly payments will never increase nor decrease. You will always know what you need to pay.
Adjustable Rate Mortgage (ARM) — These start out with a locked interest rate for the first several years, after which it can raise by 2%–6% annually, over your starting rate. Take this into consideration if you plan on staying long term. Your monthly payments will change and you will need to be prepared for fluctuating rates.
Staying Long Term?
If you are planning on keeping your property for a long period of time, then a fixed rate mortgage may be right for you. A fixed rate mortgage will keep your interest rate and payments the same for the duration of the loan. Rates are at an all time low and this is the perfect time to either purchase or refinance.
Staying Short Term?
If you are planning on selling within 5 years, then an adjustable rate mortgage may suit you better. Although, the real estate market is rather weak right now, so you may not be able to sell at a profit, or even recoup all of your expenses. You have to take into account the commissions (around 6%) for your realtor and the seller’s realtor, as well as the closing costs. Be sure to calculate the savings you may receive or the loss you could potentially experience.
What Can You Afford?
To determine the maximum mortgage amount individuals can afford, most lenders use a debt–to–income ratio. A debt–to–income ratio is the percentage of your monthly income (before taxes) that is used to pay your monthly debts. Generally, your monthly mortgage costs should not account for more than 33% of your monthly income. When your other debts (credit cards, medical bills, etc.) are added to the monthly mortgage payment, it should not consume more than 38% of your income altogether. For example, if your monthly income is $3,000, your maximum mortgage costs should be $990. When your consumer debt is added in, your monthly mortgage payment and your other credit expenditures should not exceed $1,140 per month.
Making Your Own Calculations.
Determining the maximum loan amount you should apply for is easy. Begin by determining your monthly income. Only count income that can be documented by paperwork. The easiest way to do this is to locate your W–2 forms from the last two years. Add the amounts on the two forms together and divide by 24. This is your monthly income. Once you have that number, multiply it by 0.38. This is the maximum amount you should spend on mortgage payments and consumer debt combined.
What To Know About a Mortgage Loan
For many people, getting a mortgage loan is one of the most important decisions in their lives. This means that they have decided that home ownership is the next logical step from renting and as such have decided to take the next step in their lives. Of course, it’s not a simple as some commercials might make it out. There are several things that you need to figure out and understand first before you go on the journey of buying your first home.
The first thing you want to consider is whether this will be your first and last home and as such it long-term investment, or if you will be staying short-term. The answer this question will have an effect on the type of mortgage you get as well as your interest rates and payments. One thing to consider is that if you are planning on selling know within five years you will want to make sure that you can sell product or at least recoup the initial investment. Other things you may want to think about are closing costs, lawyers fees and of course your realtor’s commission.
Something else you want to consider regarding mortgage loan is whether or not you want fixed rate or adjustable rate mortgage. This does have an effect on your monthly cost and as such is something you want to give good consideration. For the most part, what mortgage is said to be fixed rate it means that your interest rate is locked in for the term of the mortgage. The positive aspect of this is that you will always know what you pay for month-to-month. The negative aspect of course is that should rates drop, you will still be paying that same interest rate. With variable rates, may see the rates drop, but you may also see the rise again so there is uncertainty that you may want to account for.
Another thing to consider when thinking about mortgage loan are that you first need to figure out exactly what you can afford based on your income and your expenses. The general rule of thumb is that these expenses should not eclipse more than 38% of your income. After all, if they do then you could very well find yourself in a house that you may not be able to afford long-term.
One final thing to think about regarding mortgage loan is that it is always best to do your own calculations with respect to the type of loan and amount that you want first, before speaking to your lending institution. This serves two purposes: one, it shows the institution in question that you are prepared and ready to negotiate and to it helps you get more organized and have a clear plan and idea regarding what you want and what you can afford.