Most mortgage payments are split into two when they get to the bank; a small portion reduces the equity, and the balance pays the interest. That?s the way a typical home loan should work. But there exist now new types of mortgages that only pay the interest.

This means that if you pick an interest only option, every month you pay your loan, the loan balance stays exactly the same; it never gets lower. Even with more conventional mortgages, you could pay extra on your mortgage to reduce the principal balance more quickly, but the idea of this loan is to keep the monthly payment low.

Interest only loans were predicated on the theory that it doesn?t matter that the loan was never reduced, because when the home was sold, the additional value would allow the borrower to pay off the loan. It used to be that homeowners accrued equity by paying down part of the loan, and by the added value of the house.

Today?s falling home prices means that homeowners can no longer depend on an automatic increase in their home value. There are situations where interest only loans are a good solution. But it should definitely only be used as a temporary solution.

A good example would be if one partner to the home loan was attending school and the other was employed. The assumption is that he will be able to contribute to the mortgage once school is finished and therefore they will be able to make larger payments.

Another valid situation might be if the primary income owner had an erratic earning pattern, in which he had little to no earnings for a period and then a windfall income. Maybe a project consultant is only paid at the end of the project. When income is low, the lower payment (interest only) option could be used and then when the windfall amount was in, higher payments could be made to pay down more of the principal.

In the current real estate environment, not building equity by paying down the loan is a dangerous solution. You want to make sure that you pay down some of the principle so that you will have some equity built in the home, since you can no longer count on real estate market increases to do so. If no equity has been paid down, the owner will have to find additional money to pay off the mortgage when home values have not sufficiently increased.

As if there were not enough decisions to make when you are purchasing a house and getting a mortgage, lenders now have such a wide rang of ARMs (adjustable rate mortgages) and the borrower even has to choose the index upon which the ARM will be based!

When we speak of the “index”, we are talking about of the base financial instrument that the adjusting rates will be based on. Various indices are employed, including government treasury instruments, the Fed Fund rate or LIBOR.

The basic concept of an ARM is that the interest on the loan is adjusted up or down, periodically, based on a chosen underlying interest rate that is indicative of interest rates in general. For example, if you chose the CD rate as your index, when CD rates increase, your mortgage rate will go up. Adjustable rate mortgages have adjustment caps, which says that the interest rate can only be adjusted at given periods, even if the underlying interest rate goes up more frequently; this can be an advantage if you just readjusted and then rates move up. By the same token, if your adjustment is scheduled to take place right after the CD rate increased, you will have that rate for a while, even if the CD rate is lowered in the interim.

Your ARM may be linked with the Treasury Bill rate, which is the rate the US Government pays on its 90 day investments. The Fed Funds rate is the most used index for ARMs. LIBOR is the London Interbank Offered rate, which is the rate that commercial borrowers pay each other for the use of funds.

Which is the right choice depends on your own circumstances and your view of where interest rates are heading. CD ARMs adjust every six months, for example, and therefore react more quickly to interest rate changes. On the other hand, if your ARM is based on T Bills, it will move more slowly. LIBOR is one of the quickest moving indices, so if you want to take advantage of quickly falling interest rates, this is the one to use.

As we mentioned, new products are introduced each day, and one of the newest it the option ARM, which allows the borrower to choose how much he wants to pay on his home loan each month. The mechanism behind these loans is that they are basically interest only loans, so you have to pay that minimum, and then you have the choice to pay more. Be warned that minimum payment option can end up in an increasing, rather than decreasing mortgage, a phenomenon known as negative amortization.

This is a lot of information for the home buyer to digest, and the best solution is to talk to a professional mortgage broker who can explain it all and recommend the best course for you.

In bygone days, there was really only one type of mortgage, a conventional, fixed rate, term mortgage.

The world has changed, and now a potential borrower has to choose among different kinds of mortgages, such as fixed or variable rate. Fixed rate mortgages usually carry higher rates than adjustable rate loans. Banks want to be compensated for assuming the risk that rates will increase after they have fixed your rate. To compensate for this risk, they will ask for more money in the form of a higher interest rate.

If you can afford the higher interest rate, a fixed rate mortgage makes sense since you now have protection against increasing interest rates. They are not the best choice, however, if you do not plan on owning the home for too long. It will take a minimum of five years to level out the higher initial interest rates.

Anyone who believes they will be in a home for less than 10 years is likely better off with a lower, adjustable rate mortgage. The monthly mortgage will be lower with an variable rate mortgage, and even though you have the risk of higher rates, that would be the case when you sold the house anyway.

On top of the choice of fixed or adjustable rate mortgages, banks now offer more choice (some say confusion) with mortgages based on various indices, various adjustment caps and maximum rates.

Another choice to make is whether, and how long you prefer a lock in period. A lock in period will lock in the rate for a certain period of time. The rate will be determined by the length of the lock in period-the longer the period, the higher the rate.

A buyer also has to decide upon how much to put down. In most cases, the choice is simply made by how much the home buyer has been able to save up. In some cases, however, those with funds to spare may have to compare the benefit of a higher down payment with the option of earning interest with another investment.

Another choice facing borrowers is the number of points to pay. How long a mortgage is held will be a big factor here as well, because the cost of the points has to be distributed out over the term of the mortgage.

Today’s mortgage borrower has a lot of issues to think about. With all of these types of loans, and new ones being introduced on the market almost every day, such as interest only loans and options based loans, it is no wonder today’s borrower is confused.

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There are two types of standard home loans on a home: a first mortgage and a second mortgage. The first mortgage is the original mortgage that is obtained to construct or buy the home. The second mortgage is obtained some time later, for a different purpose.

The two most common uses that most people put a second mortgage to are home improvement and debt reduction. Both of these uses can make good economic sense if handled properly.

The only time it really makes sense to take out a second mortgage for home improvement is if the project is going to add to the value of the home. There are some projects that are considered more valuable in the eyes of homebuyers, such as extra bedrooms or a renovated ktchen, that will make them willing to pay more for the home.

Taking out a second mortgage to install an in ground pool may not be the best use for the funds, since a pool may not necessarily add to the value of a home.

Today, it is considered a wise financial move to reduce or eliminate high consumer debt and replace it with lower rate debt taken from the increased value of the home. Typically the interest rate on credit cards can be 16 to 20% or more, whereas a second mortgage can be obtained at 5-9%, representing a significant overall savings to the homeowner.

But be sure you use the loan for its intended purpose, and don’t “forget” to pay down those expensive credit card loans.

Since a first mortgage is paid off from the proceeds of the home in case of default, there may not be sufficient equity in the home to pay the second mortgage, and this is the risk the second mortgage lender takes.

This is the reason that rates on second mortgages are higher than on first. The bank holding the second mortgage risks that the proceeds of the home in case of default will not be sufficient to cover the loan. Since risk is one of the most important determinants of rates, this higher risk raises the rate.

There are closing costs with second mortgages just as there are with first mortgages. Make sure you are fully aware of all of the closing costs associated with the loan, so that you can be sure the total cost of the loan balances the increased value of the home or the savings on the credit cards!

Rates on second mortgages can vary a great deal, so it really pays to shop around, not only for the base rate, but also for the lowest package of closing costs. Since the loan amount of a second mortgage is typically not as much as a first mortgage, small differences in rates and costs can have a proportionately higher effect on the cost of the loan.

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If you have ever bought a home, you may have had a shock when you saw the total of the closing costs. It is important to understand these fees, especially if you are considering re-financing your home, since any savings on a new rate may disappear once you have to pay the closing costs on a new loan.

You would expect the lender to charge something for creating a new loan. A lot of these charges are not under the control of your bank, since they are charged by third parties, but there are some charges that they do control, and will adjust if they really want your business.

or inspections -Title search -Credit report

Depending on the state where you live, there may be even more.

As a prospective re-financer, you may want to know which of these fees can be reduced, or even eliminated, such as their application fee, and which are not under the bank’s control. In certain markets, banks may be willing to reduce or eliminate fees that they themselves charge, such as application fees. But many of the fees connected with the closing of your mortgage are not under the control of the bank, such as the appraisal fee, the legal fees, etc.

One of the first steps you should take is to get a good faith estimate of the closing costs. This will give you the opportunity to look at each of the charges and see if any of them can be lowered.

If you do find that any of the costs are not in line with standard rates (you can call another bank and ask them what their fees are-this will apply in some areas, such as an appraisal or a credit search, or you can file another application and get another good faith estimate), call them on it and request to negotiate the item.

Now that you know how much you will have in closing costs, you have to make sure it is worthwhile to re-negotiate your current mortgage. You can obtain a mortgage calculator on many sites on the net, and it will tell you how much the loan is going to cost over its life.

Now compare your existing home loan total cost balance against the new loan’s total costs, adding the closing costs to your new loan. Now you will know whether the lower rate is worth while. You will discover that this exercise is well worth the time and trouble.

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Once you begin considering buying a home, the first thing you may worry about is how good a rate you will get.

If you understand how rates are fixed, you will be able to understand the factors that are out of your control, and those that you can do something about.

The most important determinant of the interest rate you will be quoted by the banks is your credit score. If you have heard discussions, or seen constant ads on the net about your “FICO” score, you may now what the discussion is about.

The idea behind a FICO rating is that private agencies do an analysis on a borrower’s credit profile to determine the chances that he will be able to pay the mortgage. Banks all subscribe to the services of these credit rating agencies to find out the probable risk of lending to a borrower and the criteria the agencies use are history of payments, exposure to debt, income, job history, etc.

The next determinant that will influence your interest rate is the size of the deposit you are putting on your home.

The larger the deposit, the less exposure the lender has. In addition, the more you are willing to put down indicates to the bank that you are going to be just as committed to this property as they are.

This means that the lender will consider you a better risk and will lower your mortgage rate. In order to save for a higher down payment, the longer you would have to pay rent, so that tradeoff has to be considered.

The next factor that will be used to determine the rate is the length of the loan. When banks commit money for longer periods, they have to include a cushion into the rate.

Short term rates are normally lower than long term rates because of this. But for the homeowner, it may be worth while to take the higher interest and not have to worry about increases.

Economics is another determinant that influences interest rates. Banks have to get their money from other sources, so the more they have to pay to obtain money, the more they have to pay to lend it. If general interest rates are rising, mortgage rates will rise. This is a complicated topic that is constantly under study, whether the interest rate market is headed up or down.

But despite the fact that rates can decrease, most people prefer not to take a risk and would rather lock in a loan rate for a longer period, then to be constantly exposed to increased rates on short term loans.

Another factor that has an influence on the rate of your loan is the size of your loan. There are some regulations that limit the amount of the loans a bank can offer, and if your loan is higher than these limits, you will have to pay a higher rate.

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Unless you have been in the mortgage market for a while, you may not understand the concept of discount points. It is a simple enough idea: in order to lower the interest on your mortgage, you pay your bank some cash upfront as an incentive to lower the rate. Obviously, a reduced rate will mean a lower monthly mortgage.

When lenders speak of a point, they mean 1% of the entire loan. For a $200,000 mortgage, one point would be $2,000. You can buy more than one point and reduce your loan rate even more.

As anyone who has been shopping for a loan knows, the credit score determines the loan rate, and then the point reduction is taken off this rate. For example, if the original rate quote is 6%, based on your credit score, ask how much it will be if you are willing to pay any points. There is no set amount, but most lenders will lower a fixed rate mortgage by .25% and an adjustable rate mortgage by .375% for each point paid. In discussing our example of a $200,000 loan, above, let’s say we want one point, that is, to have the loan rate reduced to 5.75% of 5.635%, depending on whether it is fixed or floating.

If you inquire about a loan rate, you will most likely see the rate quoted with the points. So, if you are given a 6% rate, next to it will be the quotes for 1 point, 2 points, etc. Next you may see 7%, with the accompanying rate reductions per point, and so on for each rate. This is what makes it critical that a borrower know what the point system means.

It is clear that a monthly mortgage payment will be lower with a loan of 5.75% than with a loan of 6%, but you have to consider the points. This sounds like it would always be a worthwhile investment, but you must keep in mind that you are really paying interest up front. This is why it is important to look at points with a view to how long you think you’ll be living in the home. Paying points is only worthwhile for those who plan on holding the loan for quite a while.

Points are often used as a sales technique, since homeowners will have a lower payment and can pay more for the house. A seller may advertise “seller pays points” to bring in more buyers. But keep in mind that this may increase the price of the home by the amount of the points.

It is important to note that there is positively no obligation on behalf of the borrower to pay points. It’s a decision that a buyer can examine depending on many of the other factors in the loan.

There are many borrowers who get confused when they are quoted home loan rates with points. Points are upfront fees paid to the bank to induce them to lower the interest rate on a loan. Points will lower your overall interest rate, and therefore the monthly payment on your loan.

When lenders speak of a point, they mean 1% of the total loan. For example, for a $200,000 loan, each point would cost $2,000. The more points you are willing and able to afford, the lower the rate on your mortgage will be.

Your home loan rate is calculated primarily by your credit worthiness, but whatever the rate on the loan, paying points will make it lower. A buyer who was quoted 6% based on his credit rating, will receive a series of different quotes based on points. A general rule, but one that can change from one lender to another, is that one point will lower the mortgage rate .25% on a fixed rate loan and .375% on an adjustable rate loan. In the case of your $200,000 mortgage that you are willing to pay $2,000 for one point, your loan would then be reduced to 5.75% for a fixed rate loan and 5.625% for an adjustable rate loan.

Most banks will quote mortgage interest rates with optional points alongside. In other words, the quote could be 6%, 5.75% (1 point), 5.5% (2 points), etc. Next you may see 7%, with the accompanying rate reductions per point, and so on for each rate. This is what makes it critical that a borrower know what the point system represents.

The monthly loan payment is lowered with each lowering of the rate; clearly a mortgage with a rate of 5.75% is going to be less than a loan with a 6% rate. What the borrower is effectively doing is paying a part of the interest ahead of time. If you only held onto the mortgage for a short while, after you sell the house or negotiate a new mortgage, you will have paid this interest for a loan you no longer have. You have to spread the cost of these points over the time you plan to live in the home.

Points are often used as a sales gimic, since homeowners will have a lower payment and can pay more for the house. A seller may advertise “seller pays points” to bring in more buyers. But keep in mind that this may raise the price of the home by the amount of the points.

It is important to note that there is positively no obligation on behalf of the borrower to pay points. It’s a decision that a buyer can examine depending on many of the other factors in the mortgage.

Many borrowers are not aware, but they can pick a payment option for their mortgage that makes it easier to pay because it suits their needs. The more you can tailor your home loan to your personal needs, the better the chance that you will pay your mortgage on time.

Suppose you are one of those who never pays his home loan on time simply because you are too busy; you could use online bill pay or you could have an automatic loan deduction. Of course, you still have to be sure you have the money available, but if that is not an issue, and you are usually late simply because of not having the time to sit down with your checkbook, these are ideal solutions.

There may even be an additional benefit, if you deal with a lender that gives you a better rate for automatic monthly deduction. They do this because their processing fees are lower when the payment is already in the bank and because they are more assured of getting paid.

Another problem many homeowners have is coming up with the full mortgage amount at once. Even when you try to set one half of the mortgage aside with your first paycheck, you may see the balance dwindling when the check is due. A solution a lot of folks like is to pay one half of the loan in the middle of the month when one paycheck is received and the next half when the second check of the month comes in.

This is frequently a painless budgeting method since the money is “out of sight, out of mind” after the first payment is sent. In addition, they ar able to save money over the life of the loan since they are reducing the loan balance more quickly than they would with a normal monthly payment.

Banks also give option loans that let the borrower decide how much he will pay. This can be a wonderful convenience, but it can likeswise be a very dangerous thing if it is not managed correctly. The bank will have a minimum amount due, usually the interest only, and the borrower pays any additional amount he desires. But if you only remit the minimum, you will never pay down mortgage and therefore never have any equity in your home.

The system can be a good solution for earners with fluctuating income patterns, such as a person who works on projects, or a building contractor who gets a lump sum on completion. As long as you have the discipline to put the extra funds towards the mortgage when you have them, this option can be ideal.