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Different Types of Mortgages

Rarely can people can buy a home without a mortgage. When it comes to financing your new home, there are a number of options available to fit a wide range of financial needs. Learn about some of the most popular today. You can also learn lots of other valuable facts about mortgages. Some of the most common mortgages available today include fixed rate, adjustable rate, and balloon.

Fixed-rate mortgage
One of the most common mortgages is the fixed rate mortgage. It lets a homeowner know exactly what the payments will be during the length of the loan, often 30 years, but sometimes 25, 20, or 15. The fixed-rate is a good choice when interest rates are low and if you expect to live in the house for at least several years. Because the interest rate never changes, the monthly principal and interest payment never changes either.

Adjustable-rate mortgage
The adjustable-rate mortgage (ARM) is geared to homeowners who want to start with relatively low monthly payments. ARMs come with interest rates that fluctuate over the life of the loan. They begin with a relatively low interest rate, then the interest rate is readjusted at agreed upon intervals, typically increasing no more than a maximum of 2% in any one year and 6% over the length of the loan.

Balloon mortgage
This type of mortgage may be a good choice for homebuyers who don't expect to own their home past the maturity date of the balloon note -- five or seven years. Monthly mortgage payments are based on a 30-year schedule, but the entire mortgage balance becomes due at the end of the five or seven year term. The interest rate for the five to seven year term is typically lower than on a fixed-rate loan. If you decide to stay, however, you may be able to reset your interest rate for the remainder of the mortgage period.

Rates, Points, and Fees
These are three of the most important terms to know when shopping for a loan. The rate is the amount charged by a lender for borrowing money. Sometimes rates are negotiable, so be sure to inquire. A loan's annual percentage rate (APR) takes into account not only the interest rate but also points, fees, and certain other credit charges, expressed as a yearly rate.

Points are fees paid to the lender for the loan and are often linked to the interest rate. One point is equal to 1% of the loan amount. In general, the more points you pay, the lower the rate.

A loan often involves fees. Every lender should be able to give you an estimate of its fees, and many of these fees are negotiable. In some cases, you can borrow the money needed to pay fees, but doing so will increase your loan amount and total costs. No-cost loans are sometimes available, but they usually involve higher rates.

Where to Get a Mortgage?
You can get a mortgage from many different sources, like mortgage banking companies, commercial banks, community banks, credit unions, and other financial institutions. Mortgage brokers may be a source of information about where to get a mortgage. Some starting places include:

  • Your own bank or financial institution -- sometimes lenders can offer better mortgage terms to current customers
  • Real estate professionals
  • Family members, friends, and coworkers
  • Internet research
  • Your local newspaper or yellow pages
  • Fannie Mae or Freddie Mac
Shop around for the best mortgage rates. Even a fraction of a percent can make a big difference in your mortgage payment.