A home mortgage will probably be the largest financial commitment you will ever make. So shopping for a home loan means finding the right mortgage package – one that is the best for your financial needs. This can be a total nightmare, so make sure you are working with a lender you trust and can communicate openly with.
Overall, there are four main elements of your mortgage loan:
- The principle is the capital amount you are borrowing. This is the purchase price less your down payment.
- The interest is the fee that the lender charges the borrower, for using his money. This is computed as a percentage of the sum borrowed. The rate can be fixed or variable during the life of the loan.
- An escrow account may be used to keep your property taxes safe until it is time for payment.
- There are two types of insurance. Homeowners insurance in case the property is damaged accidentally, and private mortgage insurance, which may be required by some lenders if you do not have a twenty percent down payment.
As I mentioned above there are two major types of home mortgages: fixed and variable. But there are many diverse home mortgages, depending on the length of time you plan to live in your home.
If you are planning to live in your home for more than ten years, and want total constancy of payments, it is best to choose a fixed rate, this can be for 10, 15, or 30 years.
If you are planning to move within ten years, but want the loan to stay in force, just in case your plans change, or want to live in your home for ten years, but like the idea of payment stability to start with, but can accept changes later, you can choose a 10/1-year adjustable rate mortgage. This means the interest rate and monthly payment stay the same for ten years, and can be adjusted each year afterwards, for the term of the remainder of the loan.
If you are planning to live in your home for more than ten years, and can accept one change of payment, or you plan to move within seven years, but want the loan to stay in force, just in case your plans change you can choose a 7/23 or 30 due in 7 mortgage. This means your interest rate and monthly payment stays the same for seven years, but in the eighth year the rate is changed to reflect current interest rates. This will then be fixed for the remaining term of the loan.
There are many other options including one-year adjustable rate mortgages where your monthly payment is subject to modified every year, for the whole term of the mortgage. What ever you choose, make sure you are comfortable with the payments after considering what your future may hold.