This article is not those mortgage experts who have multiple mortgage refinancings under their belt. This article is to provide some simple background information for those of you who are looking at buying a home or property for the first time or perhaps are contemplating an initial refinancing of your current mortgage. Our first piece of advice is to take your mortgage and the mortgage process very seriously. You are signing a document that could impact your financial situation for the next 15-30 years and you need to be working with a mortgage broker or banker who can trust and who feels really has your best interest at heart.
As part of taking the mortgage process seriously, you should never feel embarrassed about asking lots of questions and making sure that you understand exactly the loan product that you are looking at and how elements of this product will impact you in the future with respect to payments, interest rates and amortization. The best thing you can do from the start is to maintain the best possible credit score that you can. This needs to be something you focus on long before you start the mortgage process as substantive changes to your credit can take many months or even years. Your choice of mortgage products and your interest rates will be highly impacted by your credit score.
A mortgage is a loan that is secured by real estate property. Simply put, this means that you are putting up your property to your mortgage lender as security or collateral that you will pay back the note that you took out (your mortgage). If you do not pay back you note according to the terms of your mortgage, you face the possibility of major penalties that include foreclosure and loss of your home. This compels you to find a mortgage that will work for you monthly budget both today and well into the foreseeable future.
Mortgage types are usually fixed or adjustable rate mortgages. Fixed mortgages maintain the same interest rate and payments throughout the term of the loan, which are normally 15 or 30 years. Fixed mortgages provide the security of always knowing what your mortgage payment is and having a clear idea of how the loan will amortize (or how you will pay off the principal balance of the loan) throughout the life of the loan. Many borrowers today seek out adjustable mortgages, which take on many shapes and sizes. All adjustable mortgages have a fixed period and then an adjustment period and a margin factor. As an example a 5/1 ARM (adjustable rate mortgage) would have a fixed payment and interest rate for the first 5 years of the mortgage term and than after 60 months, the interest rate and payments would adjust based on the margin factor of the note. This margin factor is usually tied to a common government benchmark such as the prime rate or LIBOR (London Interbank Offered Rate) and the margin is the difference between your interest rate and this benchmark.
Another popular type of mortgage today is an interest-only mortgage. Unfortunately, even though you will only pay interest for a period of time, it is an amortizing loan and at some point during your loan term, you will begin to pay back the principal and your payments will go up to account for the shorter amortization (or payback period). These loans back sense for borrowers that have very erratic earnings throughout the year (e.g. large year-end bonuses, project work, etc.) or have a high likelihood of having their income increase over a period of time (e.g. new doctors, wage level industrial jobs, etc.) While these loans offer more flexibility and lower payment than fixed or amortizing mortgages, they require more discipline from the borrower to handle the future changes to the payments.
There are many other things to learn and understand about mortgages but having a general sense for different mortgage products and other borrowing basics will help you feel more prepared when you speak to your mortgage company.
