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What to Know When Taking Out a Mortgage Loan
Terms to Know:

Amortization schedule – Your month-by-month payment schedule that shows how much of the interest is paid off vs. how much of the principal is paid off each time a payment is made is called your amortization schedule.

Loan term – How long the time period is that you have to pay back the loan. Home loan terms are 15, 20, 30, or 40 years.

Adjustment period – When and how often the interest rate on an ARM can change. Each ARM has a time period at the beginning where the interest rate stays the same (for example, 3 years). After that, the rate usually increases each year. That would be referred to as an ARM with a 3/1 adjustment period.

Lifetime cap - The maximum rate allowed and maximum number of increases.

Periodic cap – How much your loan is allowed to increase each year.


Mortgage Loan Types:

  Fixed-rate mortgage – A fixed-rate mortgage is one where the homebuyer is locked into the same interest rate for the entire duration of the loan, no matter its length. This is the most common type since having the same payment every month is the simplest method. The benefits of fixed-rate mortgages are protection against inflation, low risk, and the ability to plan long-term since the homebuyer will always know what their mortgage payment is. However, if rates drop, your interest rate will remain the same unless you refinance.
  Interest only fixed-rate mortgage – An interest-only option divides the loan into two periods. During the first period the homebuyer only pays off the interest of the loan. In the second period they pay both. The benefit of an interest-only option is that it frees up cash to do other things (for example, it would be good for a “fixer-upper” type situation where a lot of money will need to be put in to the home initially). However, these loans should not be offered to those who won’t be able to manage the second half of the loan when the payments increase to include a portion of the principal.
  Adjustable-rate mortgage – A mortgage during which the interest rate can change, decreasing or increasing the homebuyer’s loan payments. These are popular because they usually start with a low rate and low payment. Interest rate adjustments are based on the index and the margin. They are adjusted according to a published index, reflecting current financial market conditions. Like fixed-rate mortgages, there are also interest-only options available with adjustable rate mortgages.
  Balloon/reset mortgage – A mortgage with an amortization schedule based off of a 30-year loan. But at the end of either a 5 or 7 year term the homebuyer has a choice to either pay off the entire remainder of the loan, or reset the mortgage. Choosing to “reset” the mortgage means the interest rate will go up to the current market rate for the remainder of the loan term. Usually a home buyer can only exercise the reset option if: - they still own and occupy the home - the previous year’s payments have all been on time - there are no other liens against property If a homeowner does not qualify to use the reset option they do have the option of refinancing. However, if the homebuyer’s income has lowered at the end of their term, refinancing could prove difficult. This type of mortgage is different from adjustable-rate mortgages in that the rate can only increase one time. Balloon/reset mortgages are a good idea for the homeowner who plans on selling their home before the balloon payment
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