A mortgage is a loan from a financial institution that you pay back over time. If you don’t repay the loan, your house can be forfeit. Before deciding to take out a Mortgage, it is important to do some long term financial planning and figure out what you can afford.
There are Two Basic Types of Mortgage.
Fixed Rate Mortgage:
This is what most people think of as a mortgage. You borrow money and pay it back with interest to the lender. The repayment amount remains the same throughout the term of the loan. This is called a Fixed Rate Mortgage and is usually repaid over 15 or 30 years.
Adjustable Rate Mortgage:
Also referred to as an ARM. A mortgage where the interest rate is adjusted from time to time based on a pre-selected index. The repayment amounts fluctuate in relationship to the interest rate. Sometimes this is called a renegotiable rate mortgage or a variable rate mortgage. There are several types of ARM mortgages such as a COFI, Balloon Loan, Hybrid Loan or a Two Step loan. Ask your Mortgage Lender for additional information.
Other types of Mortgage:
Deciding whether or not to refinance your home relies on one basic question: Will I save more long term on reduced mortgage payments than I will spend on the refinancing costs? This can be a complex decision and it requires that you do your homework before taking a decision.
Home Equity Loan:
This type of loan is also known as a second mortgage. It is based on the fact that you have already paid off some of your original mortgage and now, you can borrow against that equity. This loan provides you with a fixed amount of money repayable over a fixed amount of time. This loan is also secured against the value of your home and failure to repay the debt could mean your home is a risk. Be sure to assess all fees, and penalties before applying for a Home Equity Loan.
Line of Credit:
This is a form of revolving credit using your home as collateral. Essentially, you are allowed to borrow against a predetermined amount. How Much? The amount you can borrow is based on a formula which takes a percentage of the appraised value of your home and subtracts the balance owed on your mortgage . The lender will also take into account your ability to repay by looking at your income, debts, and other financial obligations, as well as your credit history. This type of loan often has a set period of time in which you can repay the loan, for example 10 years. It is important to compare closing costs, fees and charges before signing on the dotted line.
A Reverse Mortgage allows you to convert the value of your home, your equity, into a lump sum, a monthly payment or a line of credit.
Rules for Eligibility:
- You and any co borrowers must be 62 years of age or older.
- The home needs to have a low mortgage balance or be owned free and clear.
- The home must be owner occupied.
A Reverse Mortgage need not be detrimental to your estate in the event of your death even though the loan amount is due to be paid upon your death.
- Heirs may either sell your asset at the current market value and repay the loan from proceeds keeping any appreciation for the benefit of the estate.
- Heirs may refinance the loan balance and keep the property.
Full details of this type of loan should be explored with a loan officer or financial adviser.
Here is a list of fees you can expect to pay when taking out a loan:
- Origination fee
- Appraisal fee
- Title fee, escrow fee
- Recording fee
- Monthly servicing fee
These fees, which usually run to several thousand dollars depending on the purchase price of your home, can be included in your loan balance if there is enough equity available.