Variety in mortgage offerings may ultimately be a boon to borrowers, but, at least at the start of the mortgage-shopping process, variety holds the potential for plenty of confusion. Here's a guide to some of the basics.
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5 types of mortgages |
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Always be aware that some lenders, in their desire to offer something the competition doesn't have, may offer loans that mix features in new -- and potentially confusing -- ways.
30-year fixed rate mortgage
The traditional mortgage remains a favorite of borrowers. Although the interest rate is generally higher than the starting rates on other loan types, your interest rate and payment will remain fixed for 30 years with this type of loan, and that's a boon to planning your long-term finances.
A variety on this is a fixed-rate loan with a term of 15 or 20 years. Required monthly payments on these loans will be significantly higher than on a 30-year fixed, but you will build equity faster and, in the long term, pay much less in interest. Most lenders allow you to prepay principal on a 30-year loan, so you can retire the debt earlier. Some lenders also offer 40-year terms, which lowers the monthly payment, but stretches out your indebtedness significantly and boosts the total amount you will have spent on interest.
One-year
adjustable-rate mortgage, or ARM
This is the original variety of an adjustable rate mortgage, commonly referred to as an ARM.
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| Important ARM factors |
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A one-year ARM has a 30-year term, but your interest rate will adjust every year. The interest rate will be determined by the index that your loan is pegged to, typically one-year Treasury rates or the LIBOR index (an acronym for the London Interbank Offered Rate) or the COFI index (Federal Reserve Cost of Funds Index). LIBOR and COFI indexes also are used frequently for mortgages that adjust their interest rates more frequently than once a year.
Check here for the latest index rates.
| -- Posted: March 19, 2007 |
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