Are you in the market to buy a new home or are you just looking for a better rate on your current mortgage?  Either way, FinanceGenius can assist you in understanding the basics of a mortgage.

Types of Mortgages

Generally there are two types of mortgages - a fixed rate mortgage or an adjustable rate mortgage.  Understanding the aspects of each type of mortgage will help to determine which option best suits your needs.

Fixed Rate Mortgages

Fixed rate mortgages are the most common type of mortgage for homeowners.  Their terms usually last either 15 or 30 years.  People tend to lean toward a fixed rate mortgage for stability.  Regardless of fluctuations in interest rates, a fixed rate mortgage locks in the interest rate at the time you open your loan.  Therefore, you will pay the same monthly amount for the length of the mortgage. 

The benefits of a 30-year fixed rate mortgage include lower monthly payments, an increase in the amount of tax deductions each year, and the opportunity to buy a bigger home.  However, the 15-year plan has lower interest rates than the 30-year plan leading to a dramatic change in savings over the course of the mortgage.  You will also start to build equity in your home much earlier with a 15-year fixed rate mortgage.

Adjustable Rate Mortgages

Adjustable rate mortgages, also called ARMs, vary as interest rates rise and fall.  The good thing about adjustable rate mortgages is that interest rates and monthly payments start out low.  Also, when interest rates drop the process is automatic and there is no need for extra paper work to adjust the loan.  This is typically ideal for home owners who do not plan to live in a home for a long time. The disadvantage of an adjustable rate mortgage is that although it starts off with a lower interest rate, the interest amount could potentially increase over time to a very high rate.

Mortgage Lending Process

The mortgage process begins with the borrow submitting an application to secure funds to purchase the property called origination.  Sometimes a mortgage broker is involved, and will review a number of lenders based on the borrower's information, selecting the lender that best meets the needs of the consumer.  The qualification and approved loan amount are based on several factors, including:

• Credit Score - a measurement to evaluate the potential risk involved in lending money and the likelihood of repayment in a timely manner.  Visit the FinanceGenius Credit Score section for more information.
• Down Payment - most mortgage lenders ask for 5, 10 or 20 percent of the total property value to be paid up front.  A larger down payment allows for a lower montly mortgage payment as well as the ability to afford higher valued property. The down payment is usally the biggest challenge in purchasing a home, however there are now several mortgage programs can assist with the down payment such as VA and FHA loans.
• Mortgage Insurance - protection for the lender in case the borrower does not pay back the mortgage loan.  Borrowers typically must aquire private mortgate insurance if the down payment is less than 20 percent of the appraised value or purchase price.
• Discount and Origination Points - a fee equal to 1 percent of the mortgage loan amount.  Discount points are prepaid interest on the mortage loan, and is tax-deductible.  The origination fee is charged by the lender to cover the administrative costs for making the loan, and may or may not be tax deductible.
  

Home Owners Insurance 

Home owners insurance is a policy that protects against the loss of one's home, the contents within the home including personal possessions, loss of use of the home (living expenses if displaced from the home), and liability for accidents that could affect the home.  Typically "Acts of God" such as floods, earthquakes, etc. are not covered under these policies, but special types of insurance can be purchased in areas that are prone to these circumstances.

The cost of home owners insurance is based on the property value and the value of the additional items attached (personal possessions) to the policy.  Most mortgage lenders require home buyers to purchase and maintain home owners insurance policies for the duration of the mortgage.  Home owners insurance is typically a term policy with coverage for a fixed period of time, and the premium (total cost) may be charge up front or distributed for payment throughout the length of the term.

Be sure to return to FinanceGenius for additional articles coming soon.