Shopping for home mortgages is a complicated and confusing process. To help with this endeavor, Mortgage Marvel provides an extensive FAQ section. Mortgage Marvel has taken the time to provide those in need with valuable insight regarding the mortgage financing process and information on all kinds of home loans, including adjustable rate mortgages, balloon loans, fixed rate mortgages and more. This information will make it easier for consumers to understand the process and decide on loan types and terms.
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Frequently Asked Questions About Loan Types

Are 40-year mortgages a good idea?

By increasing the standard loan term from 30 to 40 years, you reduce the amount of your monthly payment and the amount that is being applied to the principal balance of your loan. This may not be the perfect scenario, but a 40-year mortgage may be ideal for borrowers who face affordability issues and think homeownership is beyond their reach. First-time homebuyers, people living in high-cost areas or seeking manageable monthly payments may find this amortization term attractive. If a 40-year mortgage is necessary to obtain home ownership, this may be a better alternative in the long term than not purchasing a home at all.
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Are there any special programs for first-time home buyers?

Many states offer special programs to encourage homeownership for first-time borrowers in their states who meet certain income and past homeownership requirements. In many cases, the interest rates and fees may be advantageous as well. Ask your lender if your state offers any special programs.
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How much money will I save by choosing a 15-year mortgage rather than a 30-year mortgage?

A 15-year fixed rate mortgage gives you the ability to own your home free and clear in 15 years. While the monthly payments are usually higher than a 30-year mortgage, the interest rate on a 15-year mortgage is usually lower. More importantly, you'll pay less than half the total interest cost of a traditional 30-year mortgage.

If you can't afford the higher monthly payment associated with a 15-year mortgage, don't feel alone. Many borrowers find the higher payment out of reach and choose a 30-year mortgage. A 30-year mortgage is still the most common mortgage selected today.

Who Should Consider a 15-Year Mortgage?
The 15-year fixed rate mortgage is most popular among younger homebuyers with sufficient income to meet the higher monthly payments required to pay off the house before their children start college. They own more of their home faster with this kind of mortgage and can then begin to consider the cost of higher education for their children without having to make a mortgage payment as well. Other homebuyers who are more established in their careers and have higher incomes and desire to own their homes before they retire may also prefer this mortgage.

Advantages of a 15-Year Mortgage
The 15-year fixed rate mortgage offers two big advantages for most borrowers:
  • You own your home in half the time it would take with a traditional 30-year mortgage.
  • You save more than half the amount of interest of a 30-year mortgage. Lenders usually offer this mortgage at a lower interest rate than a 30-year mortgage - typically up to .5% lower. It is this lower interest rate added to the shorter loan life that creates real savings for 15-year fixed rate borrowers.

Disadvantages of a 15-Year Mortgage
The 15-year fixed rate mortgage may have some disadvantages for some borrowers:
  • The monthly payments for this type of loan are roughly 10 to 15 percent higher per month than the payment for a 30-year mortgage.
  • Because you'll pay less total interest on the 15-year fixed rate mortgage, you won't have the maximum mortgage interest tax deduction possible.
Compare them yourself! Use the "15 Year versus 30 Year Comparison" calculator in the Learning Center to help decide which loan term is best for you.
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What is an adjustable rate mortgage?

An adjustable rate mortgage, or an "ARM" as they are commonly called, is a loan type that offers a lower initial interest rate than most fixed rate loans. The trade off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.

You should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future against the advantage of the lower payment at the beginning of the loan,. It's a trade-off. You get a lower rate with an ARM in exchange for assuming more risk.

For many people in a variety of situations an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you only plan on being in the home for three to five years.

Here's some detailed information explaining how ARMs work.

Adjustment Period
With most ARMs, the interest rate and monthly payment are fixed for an initial time period such as one year, three years, five years, or seven years. After the initial fixed period, the interest rate can change every year. For example, a popular adjustable rate mortgage is a five-year ARM. The interest rate will not change for the first five years (the initial adjustment period) but can change every year thereafter.

Index
ARM interest rate changes are typically tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. The current value of most indices is published weekly in The Wall Street Journal. If the index rate moves up, so does your mortgage interest rate and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down, your monthly payment may decrease.

Margin
To determine the interest rate on an ARM, the lender will add a pre-disclosed amount to the index called the "margin." When you are shopping for an ARM, comparing one lender's margin to another's can be more important than comparing the initial interest rate since it will be used to calculate the interest rate you will pay in the future.

Interest-Rate Caps
An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:

1. Periodic or adjustment caps, which limit the interest rate increase or decrease from one adjustment period to the next.

2. Overall or lifetime caps, which limit the interest rate increase over the life of the loan.

As you can imagine, interest rate caps are very important since no one knows what can happen in the future. All of the ARMs our lenders offer have both adjustment and lifetime caps. Be sure to read each product description for full details.

Negative Amortization
"Negative Amortization" occurs when your monthly payment changes to an amount less than the amount required to pay interest due. If a loan has negative amortization, you might end up owing more than you originally borrowed. A negative amortization mortgage is something that most people should not consider.

Selecting a mortgage may be the most important financial decision you will make and you are entitled to all the information you need to make the right decision. Don't hesitate to ask your Lender for a copy of their Adjustable Rate Mortgage Disclosure which provides detailed information about the terms of the loan before you decide if an ARM is the right choice for you.
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What is the difference between a fixed rate and an adjustable rate mortgage?

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What is an interest-only loan?

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What is an Option ARM?

An option ARM is a loan program that provides borrowers with a choice of payment methods: fully amortizing over 30 years, fully amortizing over 15 years, interest-only payments, or a payment based on a below-market "payment rate" which fails to cover even the interest which is due. In such an arrangement, the difference between what you actually owe and what you are paying is added onto the outstanding loan balance each month, a condition known as "negative amortization."
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What is a balloon loan?

A balloon mortgage is usually rather short, with a term of five to seven years, but the payment is based on a term of 30 years. They often have a lower interest rate, and can be easier to qualify for than a traditional 30-year fixed mortgage. There is; however, a risk to consider. At the end of your loan term, you will need to pay off your outstanding balance. This usually means you must refinance, sell your home or convert the balloon mortgage to a traditional mortgage at the current interest rates. A balloon loan may be a good option if the initial rate is lower than that of an adjustable rate mortgage with a similar initial term, particularly if you are fairly confident you will be selling the home before the balloon term is over.
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