Most home buyers require a mortgage to secure a home or another type of real estate. As with any other type of loan, the amount is amortized over a number of years. Most mortgages carry either 15 or 30 year terms.
Mortgage Fast Facts
Here are some fast facts about mortgages:
- Two basic types are FRM fixed rate mortgages and ARM adjustable rate mortgages.(The mortgage calculator to your left calculates fixed rate mortgages).
- Many economists recommend spending roughly about 25% of your monthly income on housing. If you make $6,000 per month, your mortgage payment should be around $1,500 per month. This can vary greatly, depending on your circumstances.
- Usually new houses are easier to finance because the lender tends to bear less risk.
What is a Fixed Rate Mortgage?
If you have a fixed rate mortgage, your payments and interest rate will stay the same throughout the life of the loan. If your monthly payment is $1500, that's what you will pay every single month for 15 or 30 years.
You should keep in mind that even though your monthly payment stays the same if you have an FRM, property taxes and insurance rates are not fixed. When you calculate these amounts, you should give yourself some leeway to allow for insurance and tax increases in your budget.
Mortgage Interest Rates
An interest rate is usually determined by the current interest rates set by the Federal Reserve and the risk of a loan. Lenders assess the risk of foreclosure (when the mortgage cannt be repaid) by looking at the type of property being financed and even more importantly by looking at prior history and credit rating of the borrower.
If you have a high credit score and a history of credit, your rates will be much lower because the bank or lending institution can be fairly safe in assuming you will be able to pay your monthly payments.
Lenders typically charge 0.75% to 1% over the federal reserve rate for fixed mortgages to borrowers with perfect credit. For those will poor credit, the rates can range from 2-5% (and possibly more) above the federal reserve rate. (In June 2007, the federal reserve rate is 5.25%)
Do I Need a Mortgage Broker?
Many people hire mortgage brokers to help them find the best rates and structure special mortgage arrangements that may be more difficult for an average person to setup and negotiate.
Mortgage brokers act as the intermediaries between you and lending institutions who are willing to provide financing. Brokers are especially popular for people who have credit problems and need assistance securing these more-difficult-to-obtain loans.
Borrowers do have to beware, however, as the mortgage broker industry is not as heavily regulated and can be open to shady practices. You should do your research and make sure the mortgage broker you're dealing with has a good reputation.