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Choosing The Right Mortgage To Fit Your Income
By Joe Goertz
Most of us can’t afford to buy our new home outright, so we save up a down payment and then work out an arrangement to finance the balance. This arrangement is called a mortgage. You agree to pay a set amount and use the house as collateral. If you miss a certain number of payments, the bank has the right to declare you in default of your mortgage and foreclose on your property. You then lose everything you have invested plus the house. To avoid such problems, it is important to get the mortgage that fits your income.

There are many different kinds of mortgages. These include fixed- and adjustable-rate mortgages. There are sub prime rates for people with credit problems. There are also jumbo, balloon and construction mortgages. The most common mortgages are fixed rate mortgages where the borrower repays a fixed rate of interest over a period of 20 or 30 years. The interest rate is in effect for the life of your mortgage. The monthly payment (including interest) is determined when the loan is made. It does not change over time.

The adjustable rate mortgage (ARM) differs from the fixed rate because the interest rates and monthly payments go up and down depending on market interest rates. Hybrid ARMs usually include a one or five year fixed interest rate. After that the interest becomes that of the market place and the borrower’s monthly payment goes up and down for the duration of the loan. There are also ARMs where the borrower pays only the interest on the loan for ten years. After that the borrower must pay the current rate of interest. Some ARMs can be converted to fixed rate mortgages for a fee. The good news is that there are caps on the interest

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and payments due. Periodic caps limit prevent interest rates from rising more than a certain number of percentage points in any year. Lifetime caps limit how much the interest rate can rise over the life of the loan. Payment caps limit the amount the monthly payment can rise over the life of the loan in dollars, rather than how much the rate can change in percentage points.

Sub prime mortgages are for people with credit problems and having a credit score of less than 620. They have higher interest rates than do regular loans. Just how much higher depends on the borrower’s credit score, size of down payment, and what types of delinquencies the borrower has in the recent past. Sub prime loans can have a prepayment penalty if the loan is paid off early. They can also include a balloon payment. In this type of loan, the borrower is required to pay off the balance of the loan in full after a specified period has passed. If the borrower can't pay the entire amount, he/she has to refinance the loan or sell the house.

There are other types of loans. The jumbo loan is higher than most loans and allows you to buy a more expensive house. The downside is that you pay a higher interest rate than normal. Two-step mortgages have a fixed rate and payment for an initial period, one adjustment of interest rates and then a fixed rate and payment for the remainder of the loan.

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