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Barb Lanis

Terms to Understand While Mortgage Shopping

Friday, April 5, 2013 - Article by: Barb Lanis - The Federal Savings Bank - Message

When shopping around for the right mortgage loan it is important to have some understanding of what all makes up a mortgage in order to make the right decision for your future.

The first step in loan shopping is figuring out what type of loan you will qualify for. The four most common loan types are Conventional, FHA, VA and Jumbo.

o Conventional: Conventional mortgages require a down payment of at least 20% and don't require private mortgage insurance.

o FHA: FHA mortgages have lower down payment requirements and more flexible credit guidelines. o VA: VA mortgages require no down payment and the credit guidelines are more flexible than other programs.

o Jumbo: You'll need a jumbo mortgage only if your loan amount exceeds the conforming loan limits, which is currently $417,000. Jumbos can have either a fixed or adjustable rate.

Along with the type of loan you need to determine the repayment terms. There are two different types of repayment, a fixed interest rate, or an adjustable interest rate. One way you can get a lower interest rate is by paying for discount points. Also remember that an interest rate and annual percentage rate (APR) is not the same.

o Interest Rate: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.

o Fixed-Rate Mortgage: This is a great choice if you plan to stay in the home for the long run. The rate is fixed for the life of the loan giving you a consistent principal and interest payment each month.

o Adjustable Rate Mortgage (ARM): ARMs have a fixed rate for an initial period and then adjust up or down based on a specific benchmark. The benefit here is that you can get a much lower payment than other products.

o Discount Points: Interest prepaid to the lender at closing with each point equal to 1 percent of the loan amount.

o Annual Percentage Rate (APR): The annual cost of a loan, expressed as a yearly rate. APR takes into account interest, discount points, lender fees and mortgage insurance, so it will be slightly higher than the interest rate on the loan.

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