Do You Need a Mortgage Loan?

Mortgage loans are available from a variety of sources. Banks, savings and loans and lending companies all have funds available for mortgages, as does the government. If you are buying a house and are trying to obtain a mortgage loan, the best thing to do is to shop around using the phone book or internet. The borrower wants to find the best terms for the loan.

Mortgages differ in terms of length of time and rate of interest. The term of the loan and the interest rate are directly related: the longer the term of the loan, the higher the interest rate. The interest payment is compensation to the lender for the use of his funds.

The amount of money that you can borrow for the mortgage is dependent on several factors, basically what you can afford. Your income has to cover the monthly payments and still leave you with money to live on. The most important factor in qualifying for mortgage loans is the debt-to-income ratio. This is what percentage of your income is used to pay debts.

The more bills you have, the higher your debt-to-income ratio. A debt-to-income ratio of twenty-five percent is considered to be good. A shorter-term loan means higher monthly payments. But it also means that you will build up equity faster, pay off the loan quicker and pay less interest.

Longer-term loans have lower monthly payments because the borrowed amount is spread out over more years. It also takes more time to build equity and results in higher interest payments over the term of the loan.

Mortgage loan interest rates can also be fixed or variable. Fixed interest rates means the lender in locked into the specified rate of interest. The borrower is protected if interest rates rise but if interest rates fall, he's locked-in at the specified rate. The borrower still has the option to refinance at the lower rate. An adjustable-rate mortgage (ARM) is where the relevant interest rate is tied to an index of interest rates.

The applicable interest rate, then, varies according to the index; the ARM raises when the index rises and the ARM falls when the index falls. The terms of adjustable-rate mortgages are stated and should be looked over very carefully. On the surface this kind of mortgage looks very desirable, but if interest rates are rising, so is the interest the borrower is paying on the mortgage. Since most mortgage loans are long-term, twenty-five or thirty years, there is no way to know what economic conditions or interest rates will be like then.

What looks like a good deal now, when interest rates are relatively stable (until recently) may turn out to be a nightmare in fifteen or twenty years. So whether the borrower borrows at a fixed or a variable interest rate is one of the most important decisions to be made when obtaining a mortgage. Refinancing is always possible.

There are also government backed loans available from the Veterans Administration and the Federal Housing Administration. For both of these there is a maximum amount that can be borrowed that isn't dependent on location or on the cost of the house being purchased. This is why it is best to shop around for mortgage loans to see what the best deal is.

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