Financial matters

Finding a mortgage – what you should know

A. The principal
Mortgage principal is the amount of money you are borrowing in order to buy a house. It’s simply the price of a house deducted by a down payment.
B. The type of mortgage
Mortgages can be divided into two types:
• with a fixed interest rate, and
• with an adjustable rate
As far as a fixed interest rate is concerned, you pay the same amount of money each month. This type of mortgages involves less risk and worry about the future. However, it tends to have a higher interest rate. When it comes to an adjustable rate mortgages, they commonly provide a lower initial interest rate. Nevertheless, the rates change with the market, thus there is the risk that the payments will increase.
C. The interest rate
Finding the best deal isn’t simple. A loan with a low rate but high closing costs may turn out being more expensive. If you want to understand the overall cost of a mortgage, look at its annual percentage rate, which includes both the interest rate and other costs.
With an adjustable rate mortgage, it’s important to understand how the interest rate may change. It’s usually adjusted according to an index – a published interest rate set by a third party, such as the government. Then, the lender adds a “margin” so as to determine the interest rate on your loan. For instance, if the index is at 3.5 percent and your margin is 0.5 percent, your rate will be 4 percent.
D. The term
It’s the number of years a loan is active. Mortgages with short terms have high monthly payments, however, they may save a lot of interest over the long term.
E. Discount points
Sometimes lenders offer the chance to pay discount points to lower the interest rate of a mortgage. One point is equal to 1 percent of the principal.
F. Closing costs
When closing mortgage deals, lenders charge several fees. The best thing to do is to ask a lender for an estimate of these costs.