Mortgages tend to be complicated with varying interest rates, terms, numerous fees and conditions that can greatly impact the final outcome, or better represented by the money spent to borrow the money to buy a new home. There are financial advisors, mortgage lenders, loan officers, and other professionals that are responsible for explaining and educating people in the mortgage process.



With so many people there to assist you, you would think that there would be enough information out there to help yourself, without having to seek out assistance or worse yet, pay for a professional's advice, when you have the capacity to educate yourself about the basics. After you have understood the basics of a mortgage, then a loan officer or lender can help with the specifics and make the process happen.

Here are the top five things you need to know about your mortgage. Feel confident when going into the mortgage process by understanding each of these items and terms.

1. Type of Mortgage Rate

The type of mortgage rate determines how your monthly payment is determined. The most common types of mortgage rates are adjustable rate mortgage (ARM) and fixed rate mortgage. An adjustable rate mortgage causes the monthly payment to change every few years or so, depending on the terms, by fluctuating according to a specific index that dictates the current market rate. Your monthly payment could be lower one year than another. It could even take n unexpected spike if the current market rate jumps one year.

A fixed rate mortgage causes the monthly payment to remain the same throughout the life of the loan. You can depend on steady payments and knowing exactly what your monthly payment is every month, regardless of current market rates.

There are also bi-weekly mortgages and balloon mortgages, all with their own effect on the monthly mortgage payment. Be sure to understand the mortgage rate you are getting, so you know how your monthly mortgage payments are determined. You can choose a mortgage rate specifically to dictate how you want your monthly payments to be. Choose the one that is best for your financial situation.

2. Interest Rates and Caps

The interest rate directly influences the amount of money you must pay in interest payments. Interest is a percentage of the principal amount, or amount of money you need to purchase the house. Generally, the better your credit history and financial environment looks, the better interest rate you can get. Be sure to understand the interest rate and exactly how much the mortgage will cost you.

Caps are for adjustable rate mortgages and are limits put on the interest rate every time it changes. This protects you from having a drastically different monthly payment from one year to the next. Many caps are at five to six percent. However, there are lenders who have higher caps, or surprisingly, none at all. Be sure to understand your caps for your adjustable rate mortgage so it does not take you by financial surprise if the monthly payment is outrageous for a year! Caps are protection for you and your money.

3. Prepayment Penalties

Lenders often charge prepayment penalties. These are charges, usually a percentage of the total balance before the mortgage is completely paid off before the end of the life of the loan that the lender imposes in order to still reap the investment that he or she had initially sought out.

If there is a possibility of you paying your mortgage off early, then ask not to have a prepayment penalty. This term can be negotiated, and save you money when it is time for you to decide to pay off your loan early.

4. Assumable Mortgage

An assumable mortgage allows for another person to take over the debt and pay off the loan, as the original holder is relieved of the responsibility. Most mortgages are assumable, however, if you agree to a mortgage that does not allow this, it could not give you decision making power in an event that you would want someone to assume the mortgage.

A quick move, emergency, threat of foreclosure or other incidents may call for the mortgage to be assumed, rather than trying to put the property on the house and waiting for it to sell. Negotiate terms to where your loan is assumable, just so you have freedom in the future, if anything were to happen.

5. Length of the loan

Every loan is for a specific length of time. Generally, the shorter the term, the less money is paid on interest and the higher the monthly payments are. You build the equity in your home more quickly on a 10 year mortgage versus a 40 year mortgage.

You can adjust the length of the term to fit your ability to pay a certain amount every month, or to control how much money is spent in interest. Knowing exactly how long your mortgage will be alive until completely paid off, can affect your entire financial future, so be sure you are completely in agreement with this term and that it works well for your specific situation.

Understand these five items on your mortgage and you are half way there! Determining the type of mortgage you need is not that difficult, especially when you understand the terms and how they affect your monthly payments. Allow your mortgage broker, loan officer, or lender to present offers that may work for you. Shop around and find a deal that is best for you!