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Choosing a Mortgage
Before talking about how to get the best deal on a mortgage, let's talk about how a mortgage works. When you borrow money, your lender will expect you to not only repay the amount that you borrow, but also an additional fee known as interest. The amount of interest you must pay is determined by the interest rate on your loan. The higher your interest rate, the more money you pay. Therefore, you want to shop around to find a low interest rate.
When you start making payments on your mortgage, you will notice that you must make two payments. The first payment is called the principal payment. Your principal is the amount of money you borrowed. Therefore, any money you pay towards your principal is repaying the amount you borrowed. The second payment is your interest payment. In the early years of your loan you will pay much more interest than you will principal. That is because your lender wants to make sure they make money if you are unable to continue making your monthly payments or you move after a few years and pay off your entire principal eliminating the interest they would have earned (Orman 289).
How Your Credit Score Affects Your Mortgage
Lenders do not give out the same types of loans to everyone. When you get a mortgage, you must apply for it. Your application will include information about you, your employment record, your personal finances and other things ("The Mortgage Application Process: Some Things to Expect"). Your application information will be very important to your lender, but perhaps the most important thing your lender will look at is your credit rating. Your credit rating tells the lender whether or not you are likely to repay your loan ("Credit Scoring"). If you have a bad credit score, it may be hard to get a loan or you will only be offered loans with very high interest rates. Remember, the goal is to find a loan with a low interest rate. People with good credit will likely be given those coveted low interest rates.
After applying, if you are approved for the mortgage, the lender will tell you how much they are willing to loan you and the terms of the loan, which are the interest rate, term length and loan type. When you look for a loan, it is smart to apply for mortgages from multiple lenders in order to compare offers and get the best deals. But remember, if you decide to apply to multiple lenders, do so in a 14-day period (Quinn 119). Otherwise, your credit score could be damaged and you know what a bad credit score can do to your monthly payments.
Types of Mortgages
There are two main types of mortgages: a fixed-rate mortgage and an adjustable mortgage. The interest rate for a fixed-rate mortgage stays constant throughout the entire length of your mortgage. Whereas, the interest rate on an adjustable rate mortgage will stay constant for a certain period of time, and then start fluctuating according to the market rate.
Typically the interest rates on fixed-rate mortgages are higher than those for adjustable rate mortgages ("Consumer Handbook on Adjustable Rate Mortgages"). But do not be fooled by the low interest rates on adjustable rate mortgages. You may be shocked to find that the low rate period only lasts for a short time and that after a few months you are stuck with a very high interest rate.
The best way to choose between different types of mortgages is to have your lender show you the worst case scenario for each type of mortgage offered. Then compare the two types and decide which one will work best for you.
Keep in mind that an adjustable rate mortgage is a smart choice if you plan on moving after a few years. That is because you can save money by paying a low fixed rate for those years and move before your mortgage switches to the adjustable-rate period. Just make sure that you really do move before your fixed-rate period ends or you can afford the jump in your monthly payment. Otherwise you might be unable to pay off your mortgage.
Mortgage Down Payments
Mortgage Term Lengths
The traditional term length for a mortgage is 30 years ("Common Questions For First-Time Homebuyers"). However, you can find mortgages that vary in length, such as 15-year or 40-year mortgages. When choosing between different term lengths, remember that the shorter your term the less interest you will have to pay. The length of your term drastically affects your interest payments.
For extensive information on mortgages, read the Mortgage Guide at www.studenthomemortgageloans.com.
"Common Questions for First-Time Homebuyers." Homes and Communities. 25 Oct 2005. U.S. Department of Housing and Urban Development. http://www.hud.gov/buying/comq.cfm. 7 August 2006.
"Consumer Handbook on Adjustable Rate Mortgages." The Federal Reserve Board. 22 June 2005. http://www.federalreserve.gov/pubs/arms/arms_english.htm. 9 August 2006.
"Credit Scoring." Facts for Consumers. May 2006. Federal Trade Commission. http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.htm. 7 August 2006.
Orman, Suze. The Money Book for the Young Fabulous and Broke. New York: Penguin Group, 2005.
Quinn, Jane Bryant. Smart and Simple Financial Strategies for Busy People. New York: Simon & Schuster, 2006.
"The Mortgage Application Process: Some Things to Expect." The Federal Reserve Board. 23 July 2001. The Federal Reserve Board. http://www.federalreserve.gov/Pubs/mortgage/MORBRO_2.HTM. 24 August 2006.
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