Mortgages come in many different shapes and sizes, each with its own advantages and disadvantages. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages.Here are some basic things to know about mortgages:

Mortgage companies and lenders are the institutions that will lend you money to pay for your home.It is a good idea to shop around for a lender or mortgage company, as every institution will offers different mortgage rates and mortgages. How mortgages work, where to get one and the different deals available Types of mortgage. Other forms of mortgage loan include interest only mortgage, fixed rate mortgage, negative amortization mortgage, and balloon payment mortgage. One of the decisions you'll have to make includes whether to get a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM).

Fixed

With a fixed rate mortgage, your monthly rates will always be the same. Due to the inherent interest rate risk, long-term fixed rates will tend to be higher than short-term rates (which are the basis for variable-rate loans and mortgages). Some fixed-rate loans start with one rate for one or two years and then change to another rate for the remaining term of the loan. If you feel the current rates are low and you plan to stay in your house for a long time, you may want to consider a fixed-rate loan. With a fixed-payment loan, if the borrower was unable to meet the fixed payment, they would risk late fees or foreclosure.

Arm

ARMs generally permit borrowers to lower their payments if they are willing to assume the risk of interest rate changes. An adjustable rate mortgage (ARM), variable rate mortgage or floating rate mortgage is a mortgage loan where the interest rate on the note is periodically adjusted based on an index. A hybrid adjustable-rate mortgage (ARM) is one where the interest rate on the note is fixed for a period of time, then floats thereafter. Hybrid ARMs are referred to by their initial fixed period and adjustment periods, for example 3/1 for an ARM with a 3-year fixed period and subsequent 1-year rate adjustment periods. After the reset date, a hybrid ARM floats at a margin over a specified index just like any ordinary ARM. The popularity of hybrid ARMs has significantly increased in recent years. Like other adjustable-rate products, hybrid ARMs transfer some interest rate risk from the lender to the borrower, thus allowing the lender to offer a lower note rate. An "option ARM" is a loan where the borrower has the option of making either a specified minimum payment, an interest-only payment, or a 15-year or 30-year fixed rate payment in a given month. When pricing an Option ARM, never focus on the Start Rate of 1% or 2%, consider only the Fully Indexed Rate (FIR) which is the Margin and the current Index being used (12-MTA, LIBOR, etc. The main risk of an Option ARM is "payment shock", when the negative amortization reaches a stated maximum, at which point the minimum payment will be raised to a level that amortizes the loan balance. Historically, option ARM mortgages have been used effectively to minimize income taxes and maximize mortgage interest deductions by high net worth homeowners whose earnings are primarily derived from passive or investment income. Option ARM mortgages are increasingly available in Hybrid, or temporarily Fixed Rate varieties, from 3 to 10 years, mitigating certain negative amortization characteristics of the popular Adjustable Rate variety. As an example, a 5/1 ARM means that the initial interest rate applies for five years (or 60 months, in terms of payments), after which the interest rate is adjusted annually. Calculating this is important for ARM buyers, since it helps predict the future interest rate of the loan. This is the major risk of an ARM, as this can lead to severe financial hardship for the borrower.

Conclusion

Mortgages are a necessary part of home buying. Mortgages will allow you to own a home, whether a starter home or the home of your dreams, without having to wait until you can pay for it outright. Whether you are a first time buyer learning about mortgages for the first time, investing in buy to let or need to remortgage but have bad credit , we believe that the best way to prepare you for your mortgage decisions is to keep you as informed as possible about all the mortgage types available to you.

Posted by Gifford Bott on December 13, 2008 at 12:00 AM

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