15 vs 30 Years

Your mortgage term can be just about anything you choose. 15 and 30 year terms are popular these days, although 10 and 20 years also are available.

The shorter term, lower interest rate. But main attraction of shorter term mortgages is money you save.

For example on a $200,000 mortgage with a fixed 4.5% rate, you would pay $1013.38 a month for 30 years and $1529.99 a month for 15 years. Over 30 years you would pay $364,816.80 versus $275,398.20 over 15 years, a savings of $89,418.60 or 24.5% in interest.

If you cut a very conservative quarter of a percent off for reducing lender's exposure by 15 years, your savings will be nearly 26%.

Adjustable Rate Mortgages (ARM )

ARM’s are mortgages whose rates adjust according to terms of contract you made with lender.

Usually interest rates are fixed for first 1, 3, 5, 7 or 10 years. After that period is up, rates will be allowed to fluctuate within limits of your contract with lender.

Terms are usually 15 or 30 years (although you can negotiate just about any duration you want). There can be a balloon involved.

Because lender is not taking as big a risk on losing money if interest rates rise, these loans will have a lower initial rate than a fixed mortgage. The lowest rates will be for 1 year ARM’s and will go up accordingly.

Many people will take out an ARM even in period of low rates, such as now, because they get even lower rates and are able to afford more house. However, borrower is taking risk that he can still afford house after rates are free to rise.

It used to be common for contract to limit fluctuations to 2% a year. However, 5% swings are becoming more norm. Depending on what happens to interest rates, you might find yourself priced out of your house. Of course, you could renegotiate if rates start to go back up.

The average homeowner owns his or her house for approximately 7 years. If you plan to move before initial fixed term of ARM is up, it’s a good choice. If you plan to stay longer than ten years, a fixed rate might be a better option.

Balloon Mortgage

A balloon mortgage is one that is not completely paid off at end of its term.

For example, you might obtain a 15 year fixed rate mortgage that allows you to pay less than normal amortization schedule would call for. At end of 15 years, you will still owe a portion of principal. How much depends on terms of contract.

An interest only mortgage is an example of this type of loan. In case of an interest only loan, balloon will be full amount you originally borrowed.

This type of mortgage allows borrowers either to afford more house then they otherwise could buy or its reduces their monthly costs, allowing them to spend or invest their savings elsewhere.

Again, if you are planning to move before balloon is due and your proceeds from sale are enough to cover balloon, this might be a good idea. However, you face very real possibility of having to come up with cash when you sell to cover balloon, especially if you have to sell at a time of declining housing prices.

BiWeekly Mortgages

A biweekly mortgage is one where pay half of normal mortgage payments every two weeks. Since you are making 26 payments a year, rather than 24, you wind up paying off interest sooner and saving considerable interest.

Take example of a $200,000, 4.5% fixed rate mortgage with a 30 year term. The normal payment would be $1013.37 a month.

The biweekly amount is $506.91. But payoff is huge. Your loan will be paid 5 1/2 years earlier and you will save 28% or $32,639.75 interest.

You can set up your own biweekly mortgage plan with your existing mortgage, assuming there is no prepayment penalty (which usually only applies first few years anyhow). Simply send in or have your bank debit your checking account for one half your mortgage payments every two weeks. There should be no extra costs or fees to do this.

Or you can reach a similiar result by dividing your monthly payment by twelve and adding that to your payment. In this example that would come out to be an extra $84.44 a month.

The secret is that any prepayment, no matter how small will result in saving in interest and a shorter payment period.

Bridge Loans

Bridge loans are used in real estate transactions to cover down payment on a new home, when borrower has equity in his old home, but not enough cash.

It is generally a short term, interest only loan that is repaid when homeowner sells his old house.

Conventional Mortgage

Most mortgages are conventional, terms just vary. A conventional mortgage to most people is a 15 or 30 year fixed rate mortgage with at least 20% down.

Construction Mortgages

These are really loans that carry a higher interest rate than a normal mortgage. They allow you to borrow money to build a house and are converted into a mortgage once house is finished.

FHA (Federal Housing Administration)

The FHA is a branch of Housing and Urban Development (HUD) Department. It is a depression era creation, meant to make it possible for people to buy homes at a time when banks where not granting mortgages.

Most business people have an established relationship with their bank and take advantage of that relationship whenever they need to borrow money. However, here is question that you should be asking yourself: "is your bank taking advantage of you?". More and more answer to that question is "Yes".

Once you have an established relationship with a bank they tend to start taking your business for granted. Not necessarily in a bad way, mind you, but in way that a mutual level of comfort exists. The bank knows your reputation for keeping your word; they know how much money passes through your account and they know what your business does. You know that there is someone there that you can ring up who knows you and will work with you to get a commercial mortgage.

Seeing as how applying for a commercial mortgage can be a time consuming affair it is a natural tendency to go to people that you already know to get deal done with minimum amount of red tape. The bank realizes this and it removes their incentive to cut you most competitive deal or to negotiate on terms that you may not like. In essence you are locked into accepting whatever commercial mortgage "packages" your bank offers.