Mortgage Center
The American dream of owning one’s own home is still within the reach of many Americans. The financial security of home ownership brings incredible relief to those who experience it. And, home ownership brings stability to the family and to the community.
But buying a home is the largest and most complicated financial transaction most families will ever undertake. To attain this goal, almost everyone needs a mortgage. But what kind of mortgage is best? There are a large number of choices today, from traditional to creative.
Most home mortgages, about 75%, are of the fixed rate type. A fixed rate mortgage is one on which the interest rate is fixed for the duration of the loan. Whether interest rates in general rise or fall, the interest rate on the fixed rate mortgage remains the same. The major benefit to a fixed rate mortgage is that the mortgage payment remains the same throughout the entire term of the mortgage. This makes for ease of budgeting. However, a fixed rate mortgage carries a slightly higher interest rate than an adjustable rate mortgage because lenders perceive it as more risky.
An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate varies over the course of the loan repayment. Therefore, the monthly mortgage payment may increase with an increase in the interest rate. However, because lenders perceive ARMs as less risky, the initial interest rate on an ARM is usually lower, and hence the monthly payment is lower.
Fixed rate mortgages and ARMs are both available with differing repayment periods, typically either 15 or 30 years. The monthly payment on a 15 year mortgage will clearly be higher than on a 30 year mortgage, because the home buyer is paying off the same amount of money in a shorter time. However, the home buyer who takes out a 15 year mortgage will end up paying less in interest in the long run, because the buyer borrows the money for a shorter period of time.
One method of reducing the interest rate is to get a mortgage loan backed by the Federal Housing Administration (FHA). The FHA provides mortgage insurance to insure that the full amount of the mortgage loan will be repaid to the lender if the buyer defaults on the payments. The FHA does not loan money itself, but insures the repayment of mortgages, allowing the lender to charge a lower interest rate. FHA insured mortgages usually require lower down payments.
