The loan program is what defines the scope of your mortgage, including the type of interest rate you have and the mortgage term. For example, your loan program may be for 30 years with a fixed rate or may be for 5 years with an adjustable rate.
There are a number of different kinds of loan programs out there. Some of the most common mortgages have terms of 15, 30 and now even 40 years. In addition to the length of the loan, part of a loan program is the interest rate feature. Fixed-rate loans let you borrow at an interest rate that stays constant over the life of the loan. Adjustable-rate loans have rates that move up and down based ona standard rate index. There are also hybrid mortgages that offer fixed rates for a set period of time and then switch to adjustable rates. Some lenders even offer interest-only loans which let you pay no principal at all initially. Interest-only loans let people borrow large amounts of money in anticipation of being able to make higher payments in the future. After a set timeframe, the borrower will be expected to start paying back the principal.
Before you get a loan, you should consider which loan program is best for your financial picture. If interest rates are low, you might want to consider a loan program with a fixed rate so you are protected against future surges in interest rates. If interest rates are high, you might want to consider a loan program with an adjustable rate. That way, if interest rates drop in the future, you can take advantage of the savings. And if you are expecting a considerable increase in your income, like if you are going to be graduating from law or medical school and starting your career within a few years, an interest-only loan might work for you because it allows you to pay less for an initial time period. In any case, make sure that you will be able to pay not only the initial monthly payment but the increased monthly payment if your rate should adjust in the future or if you face a balloon payment.
Also keep in mind that the life of a loan is a big consideration when deciding on a loan program. A 30-year mortgage, for instance, will have smaller monthly payments than a 15-year mortgage for the same house. If you get a loan with a longer life, remember that you can always pay it off faster if your finances allow. Just be sure that there isn’t a prepayment penalty for paying off your loan within a certain time period.
July 12, 2006
