There is nothing like having a variety when shopping. The mortgage industry has taken that into consideration and they offer several very different options for you to choose from. As a single mother you may not be able to handle the payments and interest of certain types of mortgages so it is always best to know what is out there and how they differ. A word of caution before you begin to seek out a lender some lenders, in an attempt to one up the competition may mix different elements together. This can get a bit confusing so be sure you get all the legalese explained to you in plain English before you sign anything. If you are in doubt about anything at all do not sign it.
Here is a guide to some of the basic mortgages and links for you to learn more about each. First let’s list the five mortgages we will be discussing, they are
1. 30-year with a fixed rate
2. 1-year adjustable interest rate ( Adjustable Rate Mortgage)
4. Interest only
5. Loans with a payment option
I. The Fixed Rate Mortgage
This is the traditional mortgage that most people are at least vaguely familiar with and it is the one that most borrowers prefer. The interest rate on this type of mortgage is normally higher than other types but it is the one that gives the borrower the security of knowing it will remain the same throughout the life of the loan. Having this type of mortgage makes budgeting and planning for your future a lot easier.
One variation of this loan is the fixed rate term mortgage. This still affords the borrower the security of a rate that is the same all the time but you can choose the time limit for payment generally 15-20 years. The monthly payments will be a bit higher than the thirty-year term loan but it will be paid off faster. This method also builds your home equity (Equity is the amount of ownership value you would have in the property. Equity is calculated by subtracting the total of the unpaid balance and any liens from the fair market value of the property) Some lenders will allow you to make a separate payment on the principal, this allows you to get the bill paid in fewer than 30 years. The first couple of years of a mortgage about 80% of the monthly payment goes toward the interest so making extra payments on the principal is a very good idea. You may even find some loans that you can get a term of 40 years on but this just drags out the payments and gives them more dollars in interest.
II. The Adjustable Rate Mortgage
The one-year adjustable rate mortgage is the original spin off of the fixed rate mortgage. This has mortgage also has a 30 year term but the biggest difference is that the interest rate will rise and fall based on the economic factors each year of the loan. Whatever index your loan was generated on will determine what the interest rate for the next year will be. The types of indexes are
3. Annual and life of loan no caps
4. Payment caps
6. Frequency rate adjustment
These indexes are never a constant picture but ebb and swell with the state of the national economic structure. If the economic out look is a good one the interest rates drop but if the out look is not so good you could end up loosing the house because the interest raised the payments to more than you can handle. The London Interbank Offered Rate and the Federal Reserve Cost of Funds Index are the two main indexes that most loans are pinned to. There are some mortgages that adjust their rates more than once a year, so watch out for this type of loan. It may sound good in theory but a lot of people find themselves in financial hell because of these types of loans.
The lenders often bait you in with a teaser rate. This is a rate that is lower than the market rates. This practice gives you a false sense of what you will actually be paying because the next year the jump in your interest could be up to six points. The frequency of the adjustments plays a huge part in whether or not this will work for you. Single mothers would do well to steer clear of this type of loan, since it is fraught with uncertainties. Some of these mortgages can change as much as twice a year. This makes long-term budget planning a true nightmare. If the loan includes language that mentions a payment cap you could really be behind in the amount you are actually paying on the interest. Caps usually mean that the interest rate has unlimited ability to be adjusted. The unpaid monthly interest gets added onto the principal loan, the balance continues to grow and you end up paying more than you bargained for. Overall this is a very high-risk option.
III. About Hybrids
These are often referred to as a 3-5 year fixed mortgage. They incorporate some of the features of both the fixed rate mortgage and the adjustable rate mortgage. Look at it this way, If you are offered a hybrid mortgage loan that is 3/27 it means that you will have a fixed rate only for the first three years of the loan. After the three years the loan becomes an adjustable rate mortgage for the next 27 years. Any time your loan has a split percentage such as the 3/27 or 5/25 you will end up with an adjustable rate for the larger portion of the term. This is generally the loan of choice for people who know that they will move within the period of the fixed rate. This saves them paying extra for a longer termed fixed rate. With this type of loan you really have to be wary of the adjustment caps. Just as with the original ARM your rates could change drastically every six months. Rates have been known to drop but that is the exception and not the rule. You want an interest rate cap not a payment cap at any rate. Payment caps as we said before will stick you with owing more in interest over time.
IV. Interest Only
These loans allow the borrower the unique privilege of making payments that are applied only to the interest in the first few years. After the term of interest only payments has ended the borrowers will start making regular monthly payments on both principal and interest for the duration of the loan. This is sometimes not so good since you now only have 25 years left in which to pay off the entire principal and the accrued interest. Any rise in interest rates will make this even more of a financial burden. Single mothers who are not certain that they will be refinancing or selling the home within at least five years should in all honesty give this type of loan a wide berth. When you accept this type of loan and have made a very low down payment on the house refinancing is not as easy to get. There are many variables to consider before committing to a loan of this nature.
V. The Payment Options Loan
Any loan that incorporates the terms “option” or “choice” into its contract may fall into this category. Choices are good but when it comes down to the payment options choices the more options the more complex and confusing it can get. There are four major choices offered on average to consumers.
- Make full payment of principal plus interest
- Make more than one full payment
- Pay only on the interest
- Make a payment on the principal and partial payment on the interest
The only two choices that are straightforward are one and two. The others come with hidden baggage that can create more problems than they are worth. The first option is how you would normally pay off a mortgage, paying some on the principal and some on the interest. Option number 2 allows you to pay even more on the principal or the interest and in effect pay the entire loan off up to fifteen years ahead of schedule. The other two choices tend to get you in over your head very quickly. By paying only on the interest in any given month means that the next months interest will be calculated on the same amount of principal and be just as much. The interest continues to grow without you making the slightest dent in the principal. With this type of adjustable rate you can get to the end of the road only to find that you owe thousands of dollars more.
There are certain risk factors that are inherent in this type of loan. Even at the end of 10 years the loan balance will have leaped to as much as 10% of the original. This will also result in the loan being reevaluated, the lender will draw up a new payment schedule, in which the payments are sure to increase dramatically on a monthly basis. This is an mortgage arena best left to the professionals who understand the inner workings of hedge funds and things like that.
Another risk factor is the possibility of a prepayment penalty. Some of this can even hit you if you sell the home. As a single mother you should avoid this one at all cost. You will only loose in the long haul.
Below you will find a list of links to websites that will give you more detailed information about mortgage types.
Finally have a little fun and learn along the way use the following link to a mortgage loan calculator to see what kind of payments you can expect.