L O A N S

Don’t get confused with the number of different programs or options that you will be offered.

When shopping for your home loan, it's important to understand the basics of a mortgage. The three main facets of a home loan are:

• Loan Amount: The amount of money you borrow.
• Interest Rate: The percentage of interest you pay on the loan.
• Loan Term: The length of time you choose to payback the loan. Most loans are either 15 or 30 years.

These three are used to calculate your loan payment (Also known as P & I, or Principal and Interest).

Your Payment Options

The next choice is deciding the type of payment for your loan. 

• Fixed Payments: Your payments remain the same over the life of the loan.
• Adjustable Payments: Also known as an Adjustable Rate Mortgage or ARM. By choosing this option, you agree to have fixed payments at the beginning of the loan. The choices are normally 2, 3 or 5 years. After this initial period, your payment can go up or down depending on the way the mortgage is set up.
• Interest Only: You pay only the interest on the loan. You will not be making any payment to the principal of the loan, unless you add extra money every month for that purpose.

How ARM payments change

After your initial fixed period ends, your rate and payment will change. One of the loan documents that you will sign at closing is the Adjustable Rate Rider. This will describe how the rate will change and how many times a year it will change.

Your Interest Rate

There are many factors that are used to determine the rate of interest that you will have to pay on your home loan. Let's begin with the main two.

• Your Credit Score: Lenders use your credit to determine your score. More information about your credit report can be found in the section Your Credit.
• Loan to Value: Also known as LTV. This is based on the size of your loan in relation to the value of your home. For example, if your loan amount is $160,000, and the value of your home is $200,000, then the LTV is 80%. It's calculated by dividing your loan amount by the value of your home.

The other factors that will have an effect on your rate are.

• The type of payment you choose (fixed, ARM, interest only): Fixed payments tend to carry a higher rate than an ARM.
• The length of your loan: A 30 year loan will have a higher rate than a 15 year loan.
• The type of documentation that you use to get the loan: This will be discussed in the Loan Process section.
• Points: What you can pay to bring your rate down. Discussed in much greater detail below.
• Depending on the lender, there may be other factors as well.

Points

Your lender will ask if you want to use points to buy down your current interest rate. Most lenders will allow you to add these costs into the loan to bring down your interest rate and conversely, your monthly payments. Ask your lender about your loan options with or without points.

Prepayment Penalties

A prepayment penalty will state that you cannot get out of a loan for a certain period of time without having to pay a penalty. Most prepayment penalties are for six months of interest. Find out if your loan has a prepayment penalty. Some states no longer allow prepayment penalties on new loans.

Primary Mortgage Insurance (PMI)

Tip

• Before refinancing your home to get rid of PMI, contact your current lender and find out what steps you can take to have it dropped. 

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