If you're going to be responsible for paying a mortgage for the next 30 years, you should know exactly what a mortgage is. A mortgage has three basic parts: a down payment, monthly payments and fees. We've already discussed the down payment. The monthly payment is the amount needed to pay off the mortgage over the length of the loan and includes a payment on the principal of the loan as well as interest. The fees are all the costs you have to pay up front to get the loan.
Keeping in mind those basic concepts, we'll look at some of the mortgage variations that are available:
- Fixed Rate A fixed rate mortgage requires a monthly payment that is the same amount throughout the term of the loan. When you sign the loan papers you agree on an interest rate and that rate never changes. This is the best type of loan if interest rates are low when you get a mortgage.
- Adjustable Rate Be careful if you're considering taking an adjustable rate mortgage. An adjustable rate mortgage allows the interest rate on your loan to vary with prevailing interest rates. If rates go up, so will your mortgage rate and monthly payment. If rates increase a lot, you could be in big trouble. If rates go down, your mortgage rate will drop and so will your monthly payment. A good strategy may be to stick with a fixed rate loan to safeguard against rising interest rates. And if rates drop, refinance your mortgage to take advantage of lower rates.
- Pledged Asset Mortgages In a pledged asset mortgage, you can use assets such as stocks, bonds, other property, etc. as collateral on your loan. This eliminates the need for a down payment and also avoids PMI (Private Mortgage Insurance).
Mortgage Help Programs There are programs that will assist you in obtaining and financing a mortgage. The number and variety of these programs makes it impossible to list and discuss them all here. Check with your bank, city development office or a knowledgeable real estate agent.
- Veterans Administration (VA) Loans The Veterans Administration offers loan benefits to veterans who served in the armed forces on active duty during times of conflict, such as Korea, Vietnam, Desert Storm and Afghanistan, as long as they were not discharged dishonorably. The first step to obtain a VA loan is to obtain a certificate of eligibility, then submit it with your most recent discharge or separation papers to a VA eligibility center.
- Federal Housing Administration (FHA) Loans The FHA was created to aid people in obtaining affordable housing. FHA loans are actually made by a lending institution, such as a bank, but the federal government insures the loan. This is often the least expensive loan that non-veterans can get.