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Mortgage Loans: An Introduction to Mortgages

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If you are in the market for a mortgage there are a variety of sources to find one. Your bank, S&L, local mortgage company, and online mortgage lender are all options for securing a mortgage. There are also government programs through the VA and FHA that can help you get a mortgage.

There are a variety of different mortgages for different financial situations. Each of these loans has different options that directly impact the interest rate you might qualify for. The term length of the mortgage is one such option. Term length is the amount of time you have to pay back the loan. The longer term length you choose the higher the interest rate will be due to increased risk for the lender. Other factors that determine the interest rate you qualify for are you credit score and debt-to-income ratio.

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Mortgage Interest Rates

The mortgage interest rate you choose can be a fixed interest rate or an adjustable interest rate. Choosing a mortgage with a fixed interest rate means your interest rate and mortgage payment amount will not change. Mortgages with fixed interest rates have the lowest amount of risk for the borrower. The drawback of a fixed interest rate mortgage is the interest rates are higher and if rates decline you will have to refinance to take advantage of lower interest rates.

The other interest rates you could choose is a variable mortgage interest rate. These adjustable interest rates are periodically updated by the mortgage lender. When you have an adjustable rate mortgage your interest rate is tied to some financial index such as the prime rate; the mortgage lender will add their own markup to this index when they adjust your payment amount. Pay close attention to the conditions in your mortgage contact. Adjustable rate mortgages come with rate and payment caps to protect the borrower from excessive increases in the interest rate or monthly payment amount.

There is significantly more risk associated with adjustable rate mortgages. It is important to know what you’re getting yourself into before taking out an adjustable rate mortgage; if you have a low tolerance for financial risk this is not the mortgage for you.

Another option for your mortgage is government programs through the FHA or VA. The FHA helps homeowners with credit problems by guaranteeing their loans. Your mortgage is still processed through a traditional mortgage lender; however, the loan is insured by the government. VA loans are similar; they are loans for veterans that are guaranteed by the Veteran’s Administration. To learn more about your mortgage options including common mistakes to avoid, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

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