A new mortgage loan involves a lien on a piece of property or a house that has to be repaid over an agreed upon period of time. Here are the major factors affecting the cost of a new mortgage loan:
Mortgage Loan Rates
Mortgage loan rates can change on a daily basis. When applying for a new mortgage loan, you’ll have the option to lock in the current interest rate, which guarantees that rate while you complete the mortgage application process.
The typical lock-in period lasts 30 to 60 days. If you don’t lock in your rate, it will “float” during the time it takes to secure your new mortgage loan. If interest goes up during this period, so will your rate.
Mortgage lenders will have different down payment requirements that depend on variables such as,
Down payments typically range from 3% to 20%. If you put down less than 20%, you will have to pay private mortgage insurance (PMI). This protects the lien-holder in case you default on the loan. The cost of the insurance is added to your monthly payment.
Closing costs are the fees you pay for getting a new mortgage loan from a financial institution. They usually amount to about 2% to 7% of the loan value and are due at the time of closing. Most lenders allow borrowers to fold some of these costs into the loan itself.
Closing costs include points, title search and insurance, appraisal, filing fees, legal costs, and items that must be prepaid or escrowed such as property taxes and homeowners insurance.
There are a growing number of nontraditional loan products available today, but the majority of mortgages still fall into one or two categories.
Fixed-Rate Mortgages - have the same monthly payments throughout the life of the loan, regardless of whether it is a 15-year, 30-year or 40-year mortgage. Because the interest rate is generally higher than on other types of mortgages, you may not be able to qualify for as large a loan with a fixed-rate mortgage.
Adjustable-Rate Mortgages (ARMs) - start with lower interest rates and monthly payments, which may allow you to qualify for a larger loan. All ARMs have an initial period during which the interest rate doesn't change. After that, the interest rate will adjust based on the published index to which it is tied (usually the LIBOR and the U.S. Treasury Bill).
The best way to evaluate different mortgage loans is to compare all the costs in writing. Pay special attention to the Annual Percentage Rate. The APR factors in both the interest rate and fees.
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