When you are choosing home mortgage the mortgage company will typically offer you a selection of three basic types of mortgage loan. The mortgage quote can vary significantly depending on which type of mortgage loan that you are interested in. It is always advisable to obtain mortgage quote from more than one mortgage company and mortgage broker before you select which mortgage quote that you think is best.
Fixed Rate Mortgage Loan
The first type of home mortgage is the Fixed Rate Home Mortgage. With this type of home mortgage, the mortgage rate will be determined before you obtain the mortgage loan. The mortgage rate will stay the same during the entire life of the mortgage loan. If you obtain a 15 year mortgage loan, you will pay the same mortgage rate to the mortgage company for 15 years, if you obtain a 30 year mortgage loan, you will pay the same mortgage rate to the mortgage company for 30 years and so on. If you make all your payments, the principal and the mortgage rate will be paid off when the home mortgage term is finished, e.g. after 15 or 30 years.
The fixed rate home mortgage is popular since you will pay the same amount each month and stay protected against interest rate changes on the financial market. If the market interest drops below the mortgage rate for your fixed rate home mortgage, you can usually obtain a new mortgage loan from the mortgage company and benefit from the lower mortgage rate. This is known as home mortgage refinancing. The mortgage lender, i.e. the mortgage company, will always take the risk of being stuck with a low mortgage rate when the market interest increases. To make up for this risk, it is very common for a mortgage lender to require a higher mortgage rate on a fixed mortgage loan than for a of more adjustable mortgage loan.
Adjustable Rate Mortgage Loan
The second form of mortgage loan is the Adjustable Rate Home Mortgage. This type of mortgage loan is often referred to as ARM. With an Adjustable Rate Home Mortgage, the mortgage rate that you pay to the mortgage lender will not be predetermined for the entire life of the home mortgage. During the initial stage of the home mortgage, the mortgage rate will be fixed and you will pay the same amount of money each month to the mortgage lender. The mortgage rate will then be adjusted regularly and when the mortgage rate is adjusted, your monthly payments to the mortgage lender will change as well. How long such a fixed period will be is determined in your contract with the mortgage company and will usually be between 6 months and 5 years.
With an Adjustable Rate Home Mortgage, your mortgage rate will reflect the changes on the financial market. The exact mortgage rate will be calculated using an index and every mortgage broker has its own index. It is therefore advisable to contact more than one mortgage lender when you are looking for an adjustable rate home mortgage and try to find a mortgage broker that uses an index that is beneficial for you. Obtaining more than one mortgage quote and contacting more than one mortgage broker before you select a mortgage broker is always recommended when you are in the process of selecting a mortgage loan. You should also be aware of the fact that the adjustment periods will differ between different mortgage lender and this can also affect your choice of mortgage broker.
When you obtain mortgage quote from mortgage broker you will probably notice that Adjustable Rate Home Mortgage is offered at a lower initial mortgage rate than the Fixed Rate Home Mortgage. This is because an Adjustable Rate Home Mortgage is less risky for the mortgage lender than the Fixed Rate Home Mortgage. When shopping for Adjustable Rate Home Mortgage, you can choose extra security by selecting a mortgage company that will limit how much the mortgage rate can increase for your home mortgage. You can for instance select a mortgage lender that changes the mortgage rate no more than 0.5 of one percent on each adjustment. You will therefore be safeguarded against extremely high monthly payments that occur over night after an adjustment of your home mortgage.
Your mortgage lender will also most likely offer you a mortgage loan with a so called “cap”. The cap is an upper limit and the mortgage rate for your mortgage loan will never be allowed to increase beyond the cap. If you have a cap at 10 percent for your mortgage loan, and the rates increases to 15 percent, your mortgage lender will not be allowed to increase your mortgage rate beyond 10 percent.
You should be careful when selecting a mortgage broker for your Adjustable Rate Mortgage Loan, since it is not uncommon for a mortgage broker to use “teaser mortgage rate” to lure in new customers. A teaser mortgage rate is a very low introductory mortgage rate that will make the mortgage quote look very low. When the initial period is over, the mortgage rate will be adjusted and increase significantly. When you see a mortgage quote that looks very good, you should always ask the mortgage broker if it is a “discount rate” for the first period only.
Balloon Mortgage Loan
A third form of mortgage loan that is offered by most mortgage broker is the Balloon Mortgage Loan. The Balloon Mortgage Loan will start of as a fixed rate mortgage loan. You will pay the same amount of money to your mortgage lender each month and the mortgage rate will stay the same. After a predetermined period, e.g. 5 or 10 years, your entire loan will become due and you are required to pay back the money to the mortgage company. It is however very uncommon that the borrower actually pay back the money to the mortgage company. Instead, the borrower will try to obtain a new mortgage from the same mortgage company or from some other mortgage lender. If you choose a Balloon Mortgage Loan, you will therefore have to obtain a new mortgage loan when the mortgage period is over. This means that you must contact new mortgage broker and obtain new mortgage quote from more than one mortgage company. In some cases, you will be offered a new home mortgage by your old mortgage lender and this can be a very convenient solution. You should however always look around and contact more than one mortgage broker and obtain new mortgage quote from more than one mortgage company before you make up your mind. If no mortgage lender will offer you a new mortgage loan, e.g. due to a poor credit score, you risk loosing your house to the old mortgage lender. The Balloon Mortgage Loan is therefore less popular than the Fixed Rate Home Mortgage and the Adjustable Rate Home Mortgage.
The Balloon Mortgage Loan is usually offered by a mortgage lender to an individual that do not qualify for a Fixed Rate Home Mortgage or Adjustable Rate Home Mortgage. The mortgage quote will be severely affected by your credit score. Always contact more than one mortgage broker and receive several mortgage quote before you select one. If you are offered an unreasonably high mortgage rate by a mortgage company you should refuse their offer and continue to search for new mortgage broker. If more than one mortgage company offer you extremely high mortgage rate, it might be a good idea to improve your credit score before trying to obtain new mortgage quote from the mortgage company.
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