When you are sitting across a desk from a lender hoping to get approved for a loan, you shouldn't be the only one answering question. You should approach your lender with as much caution as they are approaching you.
Define a Fixed-Rate Mortgage
If you get approved for a fixed-rate mortgage, your annual percentage rate does not change for the entire loan term. This can be advantageous because your monthly mortgage payments do not fluctuate based on the ups and downs of capital markets or policy decisions by federal monetary authorities. A fixed-rate mortgage could be suitable if you:
- Plan to live in the same house for a long time-say, the entire loan term, or 30 years
- Want to set a somewhat predictable budget and master your long-term plan effectively
- Wish to lock in an advantageous rate over a long period
- Don't think your income will significantly fluctuate in the next few years
Tell Me More About an Interest-Only Loan
If you get approved for an interest-only loan, you pay only the interest portion of your mortgage installment every month, up to a predetermined number of months. For example, a lender may agree that you pay interest only on a 30-year $200,000 mortgage for 48 months, after which you would be obligated to remit monthly amounts that include both the principal sum and interest.
An interest-only loan may be suitable if you:
- Currently don't make that much money but expect your income to rise significantly in the future
- Plan to invest the difference between a normal payment and an interest-only payment in a project or asset that would generate more revenue in the future
- Presently earn income that is infrequent, such as bonuses and commissions
How Much Can I Expect to Save if I Choose a 15-Year Loan vs. a 30-Year Loan?
The amount of savings you can expect depends on the interest rate on both loans, but suffice it to say that a 15-year loan allows you to be debt-free sooner-and therefore, you save more on interest by opting for the shorter time frame. However, a 30-year loan is still a great option if you cannot afford the higher monthly payments that generally come with a 15-year loan.
Why Should I Consider a 15-Year Loan?
A 15-year loan is a suitable option if you are on the high end of the income spectrum and want to own your home before your children head to college. That way, you would not have to think about mortgage remittances when pondering your offspring's higher-education costs. You can also consider a 15-year loan if you are already established in your career, reap sufficient income, and just want to own your abode as soon as financially possible.
Do Lenders Levy Prepayment Penalties for Mortgages?
There is no definite answer here because it all depends on the lender and your mortgage contract. That said, most lenders tend not to charge borrowers for paying off their mortgages sooner than contractually anticipated. Talk to your prospective lender to learn more about prepayment options and penalties.
What Is the Maximum Loan-to-Value Amount I Can Get?
Loan-to-value (LTV) equals your loan amount divided by the fair market value of the property you want to buy. For example, if you want to buy a house valued at $500,000, and you request a house valued at $400,000, specialists would say that your LTV is 80%, or $400,000 divided by $500,000. Lenders pay attention to the LTV ratio because it directly correlates to the risk they take in each mortgage. Talk to your creditor to understand the company's LTV policy and lending threshold.