Getting a New Mortgage
A new mortgage is where the entire process starts. This is where you will make the key decisions that will effect how your mortgage plays out over the years. A mortgage works through a process caused amortization. Amortization is a process in which you pay back your mortgage over a set number of years. It usually starts with you paying a small portion of the principal, the actual amount of your loan, and a large amount interest, the overall fee in which it costs for you to take out the mortgage. As the payments go by the interest payments get smaller and the principal payments get larger. Upon the final payment you are usually paying almost all principal. The principal and interest payments change in such a way that your monthly payment will always stay the same.
When you take out your mortgage you will have two options right off the bat: whether you want to pay with a normal amortization schedule or interest only. Amortization is the most popular but an interest only mortgage can give you some intriguing options. With an interest only mortgage you only pay the interest on the mortgage for a set number of years. For example, if you have a five year interest only mortgage then you would only pay the interest payment for the first five years. After those five years are up the principal is added to your payments and the rest of your mortgage is re-amortized to include the principal. This process will cause your monthly payment over the first five years of your mortgage, when you are only paying interest, to be less then normal. After those five years are up, when the principal is added, your monthly payment will be greater then normal. This may be a good route if you have a lower income now but expect to have a higher income in the future when the principal is included in your payments.
After you decide whether to go with amortization or interest only you must decide what type of interest rate you are going to get. You can choose between a fixed rate mortgage and an adjustable rate mortgage.
Fixed Rate Mortgage (FRM)
A fixed rate mortgage has one fixed price that will never change. When you get a fixed rate mortgage you have the comfort of knowing that your mortgage rate will never increase. You will end up paying for this comfort, however, as a fixed rate mortgage is usually higher then an adjustable rate mortgage.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is the opposite of a fixed rate mortgage, it can change. When you are assigned an adjustable rate mortgage you get a rate that, usually after the first six months, will change every year depending on an annual index. This can be good if the index goes down and bad if the index goes up. Since there is uncertainty on your interest rate an adjustable rate mortgage will start off lower then a fixed rate mortgage.