Can You Afford It?

In the most simple of terms, a mortgage is a loan used to finance the purchase of a home. When you take out a mortgage you use the value of your home as collateral. You agree to pay back the amount borrowed, plus interest and costs, typically over a 15 to 30 year period.

There are a variety of mortgages:
Conventional: This mortgage is a contract between the lender and the borrower, at the lender’s risk. The borrower’s property is security. This mortgage is not insured by any federally insured program. However, it may be insured with a private mortgage insurance company. Conventional mortgages usually require larger down payments than FHA or VA loans.

FHA (Federal Housing Administration): The FHA will insure the loan for the lender against any loss in case the buyer cannot meet payments. FHA loans are available with as little as 3% down payment.

VA (Veterans’ Administration): This federal agency will guarantee the mortgages offered to qualified armed forces, active military personnel, veterans or their widows by private lenders. In some cases one can buy a home on VA loan with no down payment.

Jumbo: Some lenders will work out special terms for properties of very high value that fall outside typical lending standards.

Adjustable Rate Mortgage (ARM): The interest on an ARM may vary up or down at fixed intervals. The changes are tied to a financial index such as one-year Treasury notes. The ARM often offers a low beginning interest rate as a “teaser.” However, this rate will go up after a certain time. If current fixed interest rates are high, an ARM may be a good option. ARM’s are of special interest to buyer’s who know their income will rise in the future or who don’t plan to own the home for many years.

Balloon Mortgage: These mortgages are offered for short terms – usually 5 or 7 years. Payments are based on what you would pay for a 30 year loan. At the end of their term, some balloon mortgages offer option of extending the same mortgage for the remainder of the 30 year period. Payments would be based on rates at that time.

Fixed Rate Mortgage: The interest rate on this agreement stays the same for as long as you hold mortgage, no matter how interest rates change in the financial markets.

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