Comparison of Different Mortgage Options

There are two main mortgage options: fixed rate mortgages and adjustable rate mortgages. There are advantages and disadvantages to each type, and the type that is best for one person will not necessarily be the best choice for someone else. Some loans require high down payments and/or private mortgage insurance.

Fixed Rate Mortgages

The fixed rate mortgage is among the most popular types of mortgages. The monthly payment on a fixed rate mortgage includes interest and principal, and the amount does not change from one month to the next for the life of the loan. It’s important to understand that if you have your property taxes and homeowners insurance included in your monthly mortgage payment, they may increase or decrease, which in turn will effect your monthly payment, but the interest and principal of the amount borrowed remains the same. Fixed rate mortgages are generally very stable as the taxes and insurance won’t fluctuate greatly from one year to the next. Fixed rate mortgages can be obtained for a period of 10 years, 15 years, 20 years or a full 30 years. The most common terms for fixed rate mortgages are 30 years or 15 years. They can be paid monthly, or biweekly. Biweekly payments help shorten the term of the loan, since you’ll make 26 payments per year, which is the equivalent of 13 months worth. With fixed rate mortgages, the largest percentage of the monthly payments made during the early amortization period is used to pay the interest on the loan. So much in fact, that it takes approximately 22 years to pay about half of the original loan amount. As payments are made, month after month, year after year, the payment gradually shifts so that more of the monthly payment gets applied to the principal loan balance rather than the interest.

Adjustable Rate Mortgages

Adjustable Rate Mortgages feature a lower interest rate because the risk of higher rates are shared between the mortgage lender and the borrower. Many people opt for an adjustable rate mortgage over a fixed rate when they have reason to believe their own incomes are going to increase within a few years of obtaining the mortgage, or when they know they are only going to own the home for a short period of time. Adjustable rate mortgages (ARM) can have changes in interest rates on a predefined schedule, or irregularly. Each ARM starts with an initial interest rate, the rate that tempts many people to consider an adjustable rate as it is between 1 to 3 percentage points lower than the typical FRM. The lower interest rate also helps people get approved for a mortgage. The actual rate for the initial interest on an adjustable rate mortgage depends on the economy at the time.

How Down Payments Affect Mortgages

The larger your down payment, the better your mortgage interest rate is going to be. Basically, mortgage lenders are willing to give you a lower interest rate if you pay more money upfront, as the lenders consider that money collateral. When you don’t have any money for a down payment, plan on having a higher interest rate over the life of your loan, as well as higher monthly payments. You may also have to check into special government loan programs in order to purchase a home with 0% down.

Piggyback Loans

There are three types of piggyback loans that are most commonly used to purchase a home. Piggyback loans are mortgages from two or more lenders used to purchase a single property. 80-10-10 Loan: 80% of the purchase price is financed by the first mortgage lender, 10% is financed by the second lender, with a 10% down payment. 80-20 Loan: 80% of the purchase price is financed by the first mortgage lender, 20% is financed by the second lender, and there is no down payment made by the borrower. 80-15-5 Loan: 80% of the purchase price is financed by the first mortgage lender, 15% by the second lender, and the borrower makes a 5% down payment.

Mortgages with PMI

PMI is private mortgage insurance, and are charged to mortgage borrowers when the down payment made is less than 20% of the appraised value. The insurance is used to protect the lender in the event that you default on the mortgage payments, and the amount of PMI you pay will depend on the loan terms, size of the down payment, and the insurance broker. Private mortgage insurance is paid until one fifth of the principal amount of the loan has been repaid. If you are unable to put 20% down on the purchase of your home, there are other ways you can avoid paying private mortgage insurance. 1. You can use a “piggyback loan” and obtain financing from two different mortgage lenders, as mentioned above. 2. You can pay a higher interest rate. Even though the higher interest causes your mortgage payments to be higher, the advantage to paying higher interest is that your interest payments are deductible.