Mortgage Loan Basics What You Need to know

If you are in the market for a new mortgage or refinancing your current mortgage, you need to do your homework and shop for the best mortgage deal. Doing your homework means learning mortgage basics; here are the fundamentals to get you started.

Which type of interest rate depends on your situation and your tolerance for risk. If you have a low tolerance for risk and want a mortgage payment that is fixed over the duration of the loan, you will want fixed interest rate. Fixed rate mortgages are slightly higher than adjustable rate mortgages because of this added security.

If you need the lowest payment possible as a stop-gap measure for your finances, an adjustable rate mortgage may be right for you. The type of adjustable rate mortgage you choose also affects your payment amount. There are interest only and option mortgages that provide very low payment amounts; however, these mortgages carry significant risk and should only be used as a short-term fix.

Loan to value is a ratio of the amount you are borrowing against the market value of your home. For example, if your home is worth $150,000 and you want to borrow $80,000 your loan to value ratio is 53%.

Mortgage lenders do not like loan to value ratios greater than 80%; if your loan to value ratio is higher than this amount you may need to seek financing from nontraditional lenders. These nontraditional mortgage lenders write mortgages for 100% to as much as 125% or your homes value.

Points are a fee your lender charges in exchange for a certain interest rate. One point is 1% of the loan value you are applying for. This is a fee paid to the lender and is not applied to repayment of the principal balance. Paying upfront points could save you money in the long run by securing you a lower interest rate.

When you compare mortgage loan offers compare the offers with and without points to gauge if paying this fee will be worthwhile. If you are required to pay points, or decide to voluntarily, the good news is you can claim a tax deduction for the points you pay.

To learn more about saving money on your mortgage download a free mortgage guidebook.

Louie Latour is a mortgage professional and the owner of RefiAdvisor.com, a mortgage resource site offering a free gift for homeowners: "Mortgage Refinance: What You Need to Know." This guidebook helps homeowners avoid common mortgage mistakes and predatory lending practices.

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