What is a mortgage?
A mortgage is a loan secured by real estate. Most real estate buyers do not have enough money sitting in the bank to pay for the entire cost of the home upfront. A mortgage allows you to borrow the money needed to purchase the property. The loan is usually scheduled to be repaid by monthly payments of principal and interest. Since the lender is giving you a lot of money to purchase the real estate, they want some collateral in case you default on the loan. For a mortgage loan, the collateral is typically your real estate; which means if you default on your mortgage then you have to turn over your real estate to your lender. With this being said, it is important to get the right type of mortgage. There are several different types of mortgages offered and the interest rate is always changing. You want to get a mortgage that fits your personal needs. Whether you are looking for something long term like a 30 year mortgage, or something short term like a 5 year ARM, we can help you get started. Please take the time to read about the different types of mortgages below and see which mortgage fits your needs.

Fixed Rate Mortgage
Adjustable Rate Mortgage
Fixed Rate Mortgages
Fixed rate mortgages are suitable for those who prefer to know exactly what their monthly mortgage payment will be each month. A “fixed rate” simply means that the interest rate that you agree on is locked and the payments will remain the same for the duration of the mortgage. A fixed rate mortgage is best for someone who likes to stay conservative and keep their mortgage payments consistent. There are several different types of fixed rate mortgages, such as a 10-year fixed rate mortgage, a 15-year fixed rate mortgage, and a 30-year fixed rate mortgage. Take a look at this chart below to see what the approximate payments would be for a 15-year mortgage and a 30-year mortgage for a 150,000 mortgage at an interest rate of 6.00%. Notice how much less interest you will pay for a 15-year mortgage.

 
Your Costs for a $150,000 Fixed-Rate Mortgage 15-Year at 6.00 % 30-Year at 6.00 %
Your Monthly Payment: $1,266 $899
Interest You'll Pay During First 5 Years: $39,961 $43,541
Interest You'll Pay Over Full Term of Mortgage: $77,841 $173,757

A huge positive about fixed rate mortgages is that you do not have to worry about interest rate fluctuations which could increase your monthly payment. Since, your interest rate is fixed, it will not change. However, what if the current interest rate falls below your fixed rate? If your interest rate is lower, that means you could be paying lower monthly payments. If this happens, you always have the flexibility to refinance (get a new mortgage).

Who should get a fixed rate mortgage?
You should choose a fixed rate mortgage if:
• You wan peace of mind knowing that your mortgage payments will not increase.
• You plan on owning the piece of real estate for a long period of time.
• You are comfortable with the mortgage payment and it fits your budget.
Adjustable Rate Mortgages
An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate is periodically adjusted based on a variety of indices. The interest rate on an ARM is made up of two parts: the index and the margin.

Index
An index is a guide that lenders use to measure interest rate changes. Among the most common indexes are the rates on treasury securities (CMT), the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). When getting an ARM you should ask what index will be used, how it has fluctuated in the past, and where it is published.

Margin
When determining the interest rate on an ARM, lenders add percentage points to the index rate, called the margin. The amount of percentage points may differ from one lender to another, but the percentage is usually constant over the life of the loan. When you add the margin and the index together that gives you the “fully indexed rate” which is your current interest rate. Some lenders base the amount of the margin on your credit record (the better your credit, the lower the margin).
Here’s an example for calculating your interest rate: let’s say a lender uses an index of 4% with a 2% margin, the fully indexed rate (your interest rate) would be 6%. However, if the index on this loan increased to 5%, the fully indexed rate would then be 7%.

Adjustment period
The adjustment period is the length of time that an interest rate period of an ARM is scheduled to remain unchanged. Once this period is over, the interest rate is reset and a new monthly loan payment is recalculated (based on index and marginal rate). The adjustment period is very important and varies with each ARM. The adjustment period could be every month, quarter, year, 3 years, or 5 years.

Who should get an ARM?
You should get an ARM if:
• You believe that rates will remain the same or decline in the future.
• You plan on moving soon, potentially avoiding higher future payments.