House Mortgage: What Terms You Need?

by Nathalie Fiset
Mortgage is a secured loan designed to finance people in buying a house or property. It is a long term loan which uses the house as collateral. So in case the borrower was not able to pay the loan, the lender (mortgage company, bank, and lending institutions), can foreclose the house sell it.
There are two basic types of house mortgage: adjustable rate mortgage and fixed-rate mortgage. These 2 vary entirely and from here you shall select what term you need.
Adjustable Rate Mortgage (ARM)
Also called variable rate mortgage, the adjustable rate mortgage has varying monthly fee depending on the behavior of the national interest rate. Usually, a fixed interest rate is set for 1, 3 , 5, or 10 years period, depending on the choice of the borrower. In other words, the annual percentage rate is fixed during the first year, first 3 years, first 5 years, or first 10 years . After the initial term, the APR is set periodically to cope with the current interest rate.
Why choose ARM?
The national interest rate may go down during the duration of your loan. This will lower down your monthly and will give you good savings. You can also choose between the different terms offered and take full advantage of your loan. The ARM will allow you to own the house faster than fixed-rate loan.
Why is it hard to depend on ARM?
You can never depend on anything that is uncertain, especially when it comes to your finances. The ARM depends on the national rate. When the rate is high, the payment goes with it and vice versa. Also, different computation for the monthly payment makes it difficult for borrowers to predict how much will they pay in the future.
Fixed-Rate Mortgage.
This type of mortgage loan is often offered either on 15- or 30-years term. Fixed-rate loan is characterized for its constant monthly payment rate. In other words, fixed-rate loan offers one and the same monthly payment all throughout the life of the loan. And because the rate does not change, any activity on the market or anything that will influence the interest rate of the loan will not affect your monthly payment. Because of this nature of payment, fixed-rate mortgage remains to be the more popular among the two.
Why choose fixed-rate mortgage?
Aside from the reason given above, fixed-rate mortgage can provide you with better long term plan. As your monthly payments are not influenced by the rise and fall of the rates, you will know how much you will pay 5, 10, 15 or 30 years from now.
Why is it hard to depend on fixed-rate mortgage?
Not because you can take advantage of a fixed monthly payment means that this is always the better choice. When you take fixed-rate mortgage, you subject yourself in paying the interest on the first years of the loan. Meaning, after several years of paying, the lending institution still owns most of your property as your payment goes mostly to the interest. This is less advantageous if you prefer to have a fast-phased ownership process of the house.
Moreover, the monthly fee is higher than the adjustable rate mortgage since the lender has to offset any future losses in case the national interest rate rises. And after some time when the interest rate falls, the only way to take advantage and lower your monthly payment is to refinance your house, which can give you great risks.
What are the things you should be aware of on a fixed-rate mortgage?
1. Many mortgage companies, as part of their promotional strategy, offer introductory rates which can create an illusion that you will pay less for the loan. But after several months, when the promo expires, the monthly payment shoots up which may not be affordable to you.
2. Low interest rate during the first few months of the loan is not entirely savings. If not on the higher fixed-rate given when the introductory promo expires, the savings from the rate is transferred to the payable points.
3. A 15-year loan has higher monthly payment which allows you to own the house faster. It also has lower interest rate.
4. A 30-year loan has lower monthly payment. It has a slightly higher interest rate.

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