How to Apply For a Mortgage Loan

There are several types of mortgage (home-buying) loans offered by lending institutions today and it can be a bit daunting, especially if you've never purchased a house before. Other than choosing your property, the type of loan that you get is the most important decision involved in buying a home. A mortgage loan is merely the remaining balance of the property, minus the down payment, that you will borrow and repay.

Depending on your circumstances and the economic climate, your choices are between a fixed-rate loan and an adjustable rate mortgage. The latter are frequently referred to as variable rate, or the more commonly known term ARM.

A fixed rate mortgage is one that charges a certain amount of interest, say 6%, and no matter how high or low the national interest rates throughout the period of your loan, your interest rate never changes.

Of course, the lender will add a few points onto your interest charge when issuing the loan to adjust for their own losses should the interest rate fall during the life of the mortgage. Your major advantage is knowing exactly how much interest is being added to your monthly payment; your payment will remain the same for the life of the mortgage no matter how interest rates fluctuate.

An ARM mortgage, on the other hand is not consistent . An adjustable rate mortgage begins with a very low interest rate for the first few years then begins adjusting the interest depending on the average interest rates of the day. Your house payment will rise and fall monthly, with no floor or ceiling and no way to predict which direction it will go.

After the initial 'reward' period of below-average interest, your budget is at the mercy of interest rates. The average interest rate paid by a homeowner with an ARM is generally lower over the long term than if they had gotten a fixed rate. The fluctuation of payments, however, is a strong incentive to have a reserve of funds in the event the interest rate substantially rises. In the late 70's and early 80's, mortgage rates were as high as 14-16%!

A third type of mortgage loan is a Reset Loan, sometimes referred to as a balloon loan. Like a fixed rate mortgage, a balloon loan has an initial fixed rate of interest (generally the first 3, 5 or 7 years).

The rate on a balloon loan, unlike the fixed rate loan, are about as low as those of an ARM. The drawback of a Reset Loan is the term of the loan; after the initial period of low interest you must repay the entire balance of the loan. There are obvious drawbacks to this type of mortgage loan and homeowners typically refinance their balloon loans when they approach the time of repayment.

As you can see, you have many options when it comes to financing your property. Research, good financial advisors and an honest self-appraisal of your financial health are essential to choosing the right type of mortgage for your new home.

Joe Kenny writes for Glitec.org, offering UK loans in the UK, visit them today for mortgages or for US residents, Rebuild for mortgage loans