A mortgage loan consists of two parts: principal and interest. The amount of money borrowed is the principal. The amount paid for borrowing the money and repaying it over a period of time is the interest. The mortgage paid by the borrower each month goes partly towards redeeming his principal and partly towards his interest. The shorter the loan term, the lower the mortgage interest rates.
Fixed and Adjustable Mortgage Rates.
Mortgages rates can be of many types. The two main basic ones are fixed rate mortgage and adjustable rate mortgage. In a fixed rate mortgage the interest rate remains constant throughout the term of the loan. There is stability in the mortgage payments to be made each month. It is ideal for those who plan to keep their homes for a long period.
In an adjustable rate mortgage(ARM) the interest remains stable for some time and then varies according to a market index. It is ideal when the interest rates are low. Though the initial payments are less than in a fixed rate mortgage, it can rise over time.
30 Year Fixed Rate.
The mortgage rates are fixed and payments are made in installments spanning 30 years. Monthly payments are low with unchanging payment schedules as interest rates remain constant throughout the loan period. It is ideal for those who do not intend moving for some time.
15 Year Fixed Rate.
The mortgage payments are fixed and payments are made over a period of 15 years. The monthly payments are higher than in a 30 year fixed rate mortgage. But lower mortgage interest rates, shorter loan period and owning the house in a shorter time help save money in the long run.
Fully Indexed Rate.
An ARM consists of two parts: margin and index. These two together determine the fully indexed rate which is the rate to be paid to redeem the loan. Margin is the fixed part of an ARM and remains unchanged throughout the loan period. Index is the variable part of an ARM and changes periodically. Fully indexed rate is the sum of margin and index.
5/1 ARM
This is usually a 30 year loan where the rates are fixed for 5 years. From the 6th year till the loan is closed, the rates are adjustable. Monthly payments are then determined by the fully indexed rate. This is ideal for those who intend to keep their home for at least 5 years.
1/1ARM
This is also a 30 year loan where the rates are fixed for the 1 st year. From then on till the loan is closed the rates are adjustable. Here also monthly payments are determined by the fully indexed rate. People who intend selling their home within a short time generally choose this type of ARM. |
