The Basics of Mortgages
Because of the high cost of most real estate, very few people can purchase a home with savings alone. Therefore, if you are like the vast majority of people, you will be borrowing money from a financial institution to purchase the property you want. Called mortgages, these loan products can sometimes be unclear. Knowing the basics of how mortgages work can help guide you to the loan that is most appropriate for you.
How long is it going to take you to repay the loan? That depends on the term of your mortgage. A term is the number of years that you agree to pay back the amount you borrow.
The term also affects the cost of your mortgage payments. Shorter repayment periods mean higher monthly payments but less interest you pay over the life of the loan, while longer terms will give you lower payments but will cost more over the long run. The traditional mortgage term is 30 years, but they can range from ten to 30 years.
TYPES OF MORTGAGES
There are several types of mortgages available, with the most common being fixed-rate, adjustable, and interest-only.
Fixed-rate mortgages come with an interest rate that remains constant over the life of the loan. 30-year mortgages are the most common, but you may also choose a 20-year, 15-year, and even 10-year fixed-rate mortgage. Though the mortgage interest rates tend to be higher than for other loan types, the rate is fixed and your payment won’t change. This stability makes them the most secure type of mortgage for buyers.
Adjustable-rate mortgages (ARMs) are offered at an initial fixed rate for a certain period of time, generally lower than market interest rates. With a 5/5 (the first number stands for the number of years in the initial fixed period, while the second indicates how often the new rate will adjust). When the fixed rate period expires, the rate becomes variable and adjusts, along with the payment (up or down) based on the qualifying variable index rate. Each 5th year anniversary thereafter, the rate will adjust on the anniversary date until the loan in paid in full.
There are certain interest rate caps that apply to an ARM: an overall cap limits how much the interest rate can increase over the life of the loan; a periodic cap limits the amount the interest can increase from one period of adjustment to the next; and a payment cap limits the amount the monthly payment can increase at each adjustment.
Arms tend to have lower initial rates and therefore lower monthly payments. They can be a good option if money is tight in the early years; as long as you are confident you can meet future interest and payment increases.
Idaho Central offers a variety of home loans designed specifically to meet your needs. Whether you’re just starting out and need your first home, are looking to upgrade or are ready to build your dream home, Idaho Central has the loan for you! We offer quick, local decisions to better serve you.
Home Equity Line of Credit (HELOC)
ICCU offers a convenient Home Equity Line of Credit. A Home Equity Line of Credit is a form of revolving credit available on owner occupied real estate property. The interest rate is a variable based on prime rate plus a margin factor. A specific amount of credit is set by taking a percentage of the appraised value of the home and subtracting the balance owed on the existing mortgage. Income, debts, other financial obligations, and credit history are also factors in determining the credit line. Once approved, you can easily borrow against your credit line. The first 10 years of the contract are considered the “draw period” meaning you can access any amount of the HELOC balance that is available. The payments are “interest only” unless you choose to pay toward the loan principal. The advantage of a home equity line of credit is that you can take out relatively small sums periodically, and interest will only be charged when you deduct the money. The disadvantage is the temptation to charge indiscriminately. Homeowners have different needs when it comes to tapping into the equity in their home.
Idaho Central Credit Union has numerous resources to help borrowers make smart financial decisions. To learn more about Idaho Central Home Loans, visit Home Loans, Financial Education Center, Financial Calculators, or contact a Mortgage Loan Officer to apply for a home loan. If you currently own your home and you’re ready to apply for a HELOC click here.