Get The Mortgage Know-How

Did you know that you can buy a house and pay for it in monthly installments over the course of 15-30 years? This means that instead of paying $150,000 for a house you could pay around $875 a month, based on the interest rate, for 30 years. Instead of waiting to save up $150,000, which could take you multiple years, you can buy the house now and pay it off instead of waiting and saving.

How A Mortgage Works

When you apply for a mortgage you will have to decide length and whether you want Fixed Rate Mortgage (FRM) or Adjustable Rate Mortgage (ARM). These are your interest rates. A FRM locks in your interest rate for the entire length of the mortgage. You will always know what your interest rate is and it will never go up, it is a security you have to pay for. FRMs are usually higher, initially, then ARMs. An ARM is just the opposite, it starts with a base interest rate and adjusts based on an index. ARMs usually start at a lower rate then FRMs but there is no guarantee they will stay there. You must make a calculated decision based on how you think the market will be in the next few decades.

Your next decision is to take out a normal mortgage or an interest only mortgage. A normal mortgage works like, well a normal mortgage. You start paying off the premium, the actually amount of your mortgage, and the interest right away. You continue to make this payment over the life of your mortgage. An interest only mortgage works a little differently. You only pay the interest on the mortgage for the first few years, usually between 5-10 years. This causes your monthly payment to be lower then a normal mortgage. Once your "grace" period is over the premium is included and the monthly payments are recalculated based on the amount of interest you have left to pay. At this point your monthly payment will be higher then if you had gone the normal mortgage route. This is a good option for someone who wants to save money right away, but will have an increase of income when the interest only portion of the mortgage is done.

Once you decide between these options you will have your basic mortgage. The longer your mortgage the less of a monthly payment you have to pay, but the higher your fixed interest rates will be. Making all these decisions and predicting the future can be daunting, but if you make the wrong decisions you can always refinance.