Tuesday, October 16, 2007

Choosing the Right Mortgage Can Be a Thrill

Source: Informa Research Services

While the thought of paying off an entire mortgage may have your stomach flipping, either from excitement or nerves, choosing a mortgage loan can be a lot like choosing a roller coaster at a large theme park: exciting, a little daunting, and important to your future well-being and happiness. Like coasters and other amusement rides, mortgages come in a variety of shapes, sizes, and speeds to accommodate your personal taste and situation.

Choose the size of your adventure: teacups or colossus?
Even at the largest theme park, rides are offered in a variety of sizes from "kiddie" rides for the little tikes to the extreme coasters that push the limits of speed, gravity, and the adrenaline rush. Likewise, most financial institutions offer a variety of mortgages made to fit homeowner needs. These usually come in the form of conforming mortgages and jumbo mortgages. The main difference between these choices is that conforming mortgages are under the threshold (currently, $417,000 for a single-family residence) set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (more commonly referred to as Fannie Mae and Freddie Mac, respectively), whereas jumbo mortgages are over the $417,000 threshold.

Mortgage term: How long is your favorite ride?

Another factor that coaster buffs consider in deciding which coasters to ride is the length of the ride. Would you rather have a slow and steady five minute ride or an adrenaline-packed 30 seconds? Similarly, the term of a mortgage loan, or the amount of time over which you have to pay the mortgage loan back, should influence your decision. While longer mortgage loan terms allow you to have lower monthly payments, some people might prefer the financial and psychological comfort of paying off their mortgages more quickly despite the larger monthly commitments (i.e. a 30 year fixed vs. a 15 year fixed)

Speaking of monthly payments, consider your spending habits and abilities over the term of the mortgage. For instance, a balloon mortgage typically requires very low payments in the beginning, but the balance of the mortgage is due in full all at once. While the low starting payments may be tempting, be realistic about whether you will be able to pay off the loan in its entirety when it is due.

Are you ready for that 300-foot rise?
The most obvious and attractive features of coasters are the loops and the drop. Likewise, many people only notice the interest rates attached to mortgage loans, and with good reason. Interest only adds to your monthly payments and the overall cost of your home; thus, you should use resources, such as the Internet, to shop for the best mortgage loan interest rates.

Mortgage loans come attached to a fixed or variable rate (also called adjustable or floating rate). If the rate is variable, look at what interest rate caps are in place (both annual and lifetime). Interest rate caps can apply not only to the frequency and amount of interest rate changes, but also the total adjustment in the interest rate over the entire span of the loan.

Lastly, in making any financial decision, be sure that you understand the terms and conditions of the mortgage loan you decide to take. You can save yourself hundreds and thousands of dollars by simply understanding what is expected of you and what you should expect from the lender. Having this thorough understanding will ensure that you can enjoy the thrilling ride to homeownership.

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