Most of us can't pay for our new home in full, so we save up for a down payment and then figure out how to pay for the rest. A mortgage is the name for this kind of deal. You agree to pay a certain amount and put up your house as security. If you don't pay your mortgage for a certain number of times, the bank can say that you're in default and take your home. Then you lose the house and everything you've put into it. To avoid these kinds of problems, you should get a mortgage that fits your income.
Mortgages come in many different forms. These include mortgages with fixed and changing rates. People with bad credit can get rates called "sub prime." There are also construction, jumbo, and balloon mortgages. Most mortgages are fixed-rate mortgages, where the borrower pays back the loan over 20 or 30 years at a fixed rate of interest. The interest rate will stay the same as long as you have a mortgage. When the loan is given, the monthly payment, including the interest, is set. It doesn't change as time goes on.
The adjustable rate mortgage (ARM) is different from the fixed rate mortgage because the interest rates and monthly payments change depending on the market interest rates. Most hybrid ARMs have a fixed interest rate for either one or five years. After that, the interest rate will be based on the market, and the borrower's monthly payment will go up and down until the loan is paid off. There are also ARMs in which the borrower pays only the interest on the loan for ten years. After that, the borrower has to pay interest at the current rate. Some ARMs can be changed for a fee into fixed-rate mortgages. The good news is that the interest and payments due are limited. Periodic caps stop interest rates from going up more than a certain number of percentage points in a single year. The interest rate can only go up so much over the life of the loan. Instead of limiting how much the rate can change in percentage points, payment caps limit how much the monthly payment can rise in dollars over the life of the loan.
People with credit problems and a credit score of less than 620 can get a subprime mortgage. The interest rates on them are higher than those on regular loans. How much higher depends on the borrower's credit score, the size of the down payment, and what kinds of late payments they've made in the past. If you pay off a subprime loan early, you might have to pay a fee. They can also have a payment that is due all at once. In this type of loan, the borrower has a certain amount of time to pay back the loan in full. If the borrower can't pay the full amount, he or she must either refinance the loan or sell the house.
There are many different kinds of loans. The jumbo loan has a higher interest rate than most loans, but it lets you buy a more expensive home. The bad thing is that you have to pay more interest than usual. In a two-step mortgage, the rate and payment are set for the first part of the loan. After that, the rate changes once, and then the rate and payment stay the same for the rest of the loan.
