Along with other decisions you will find yourself making while shopping for a mortgage, you will be deciding whether to take a fixed-rate mortgage (FRM) or an adjustable rate mortgage (ARM).

As the name implies, the interest-rate of an FRM will remain the same throughout the life of the loan. If interest rates are low when you are buying or refinancing a home, an FRM is a good choice, because you can lock in that low interest rate. ARMs, however, will fluctuate as interest rates rise and fall. Your 6 percent rate today could drop to 5 percent next year or end up at 8 percent if the market rate goes up.

Exactly when the rate of your ARM loan will change depends upon the terms of your loan agreement, which could see rates change every three months, once a year, every three years, or not until five years. It’s not uncommon to find ARMs that start at a fixed rate and convert to an adjustable rate after several years.

ARMs also generally come with a “cap,” which limits the amount a lender can raise its rate. The cap for most ARMs is 2 percent, meaning a lender can only increase its rate 2 percent within a single adjustment period. But several adjustments can turn a 4 percent interest rate at the beginning of the loan into a 10 percent interest rate later on.

As you might imagine, FRMs are more popular. Most home buyers want the security of knowing how much their mortgage paying will be each month. An FRM will allow you to more easily manage your monthly and yearly budget. If you have an FRM and rates do drop precipitously, you can always refinance.

Along with other decisions you will find yourself making while shopping for a mortgage, you will be deciding whether to take a fixed-rate mortgage (FRM) or an adjustable rate mortgage (ARM).

As the name implies, the interest-rate of an FRM will remain the same throughout the life of the loan. If interest rates are low when you are buying or refinancing a home, an FRM is a good choice, because you can lock in that low interest rate. ARMs, however, will fluctuate as interest rates rise and fall. Your 6 percent rate today could drop to 5 percent next year or end up at 8 percent if the market rate goes up.

Exactly when the rate of your ARM loan will change depends upon the terms of your loan agreement, which could see rates change every three months, once a year, every three years, or not until five years. It’s not uncommon to find ARMs that start at a fixed rate and convert to an adjustable rate after several years.

ARMs also generally come with a “cap,” which limits the amount a lender can raise its rate. The cap for most ARMs is 2 percent, meaning a lender can only increase its rate 2 percent within a single adjustment period. But several adjustments can turn a 4 percent interest rate at the beginning of the loan into a 10 percent interest rate later on.

As you might imagine, FRMs are more popular. Most home buyers want the security of knowing how much their mortgage paying will be each month. An FRM will allow you to more easily manage your monthly and yearly budget. If you have an FRM and rates do drop precipitously, you can always refinance.

As interest rates drop, many homeowners consider refinancing. And if you’ve inquired with a few lenders, you’ll probably start getting phone calls and e-mails daily about the proposition of doing so.

There are several reasons people consider refinancing, one of which is to take advantage of lower interest rates to either decrease their monthly mortgage payments, or shorten the terms of their loan.

One of the keys to refinancing is watching interest rate fluctuatations. Securing a low rate is not always easy. Daily bond fluctuations can serve as good indicators of the direction interest rates may be moving. However, since you can never be too sure, you may wish to lock in the lowest rate you see, which you can do more than a month before closing (which is essentially completing the refinancing process). If not, you’ll get locked into a rate five days prior to closing.

Similar to obtaining your first mortgage, you’ll need to reapply to refinance your mortgage. You can save on paperwork, and sometimes on fees, by staying with the same lender you used the first time. Knowing the degree of competition out there, it’s advantageous for your lender to try to give you a good deal. However, there are numerous lenders, and you can shop around, not only for a good rate, but also to save money on fees. The closing process, in which the mortgage ends with one lender and begins with a new lender, typically generates a number of fees that can, and often do, add up. Obtain a list of all potential fees and what they will likely be in advance. Ask for a quote that includes the appropriate fees.

If you’re planning to stay in your home for a number of years, it’s a good idea to take advantage of low interest rates. Just as when you obtained your original mortgage, you can also get points, which means paying off a percentage of your loan amount. If you have extra cash available, this can be helpful. Each point is one percentage of the total amount of your loan. By adding points, you can lower your interest rates.

You can also “cash out” by refinancing for more than the principal due on your original home loan. This is essentially a means of getting some cash as a tax-free loan on the difference between the value of the house now and its value from the initial mortgage. For example, if you have a mortgage balance of $100,000 and your property is now worth $300,000, you could refinance for $175,000 and have $75,000 to keep tax-free, less the transaction costs and fees. According to Freddie Mac, one of the nation’s premiere mortgage secondary lenders, nearly 60 percent of refinancing today is for the purpose of cashing out.

It’s not surprising that some homeowners confuse the terms “second mortgage” and “home equity loan.” After all, a second mortgage is a type of home equity loan. But more often than not, home equity loan is used to describe a home equity line of credit, or HELOC. If you want to take advantage of the equity that you have built up in your home, you will need to decide if a HELOC or a true second mortgage is best for you.

Before discussing which might be better for your purposes, let’s look at some of the basics of each. A second mortgage pays out a fixed sum of money to be repaid on a set schedule, like your initial mortgage. Unlike refinancing, the second mortgage does not supersede the first mortgage. Second mortgages are usually 15- to 30-year loans with a fixed rate of interest. Like the initial loan, the rate of interest and points (if any) will be based on your credit history, the price of the home, and the current interest rate. While the interest rate on a second mortgage may be a little higher, the fees are generally lower. Should You Pay Points?

A HELOC, however, is similar to a credit card, and it may even include a credit card to make purchases. Like credit cards, interest is charged, and the amount you can borrow is based on your creditworthiness.

To determine the limit of your HELOC, lenders will look at the appraised value of your home and start their calculations at 75 percent of that value. They then subtract the outstanding balance owed on the mortgage. If your home was appraised at $200,000, the lender would typically look at a maximum of $150,000 or 75 percent. If you had paid off $100,000 of your $180,000 loan, the lender would then deduct the remaining $80,000, which would mean you would have a maximum of $70,000 available on a HELOC if you had a very good credit history. Learn how to Evaluate Your Creditworthiness.

Your current financial needs will help determine which type of loan is right for you. If you need money for a one-time expense, such as building a new deck or paying for a wedding, you would probably opt for the fixed-rate second mortgage.

But if you forecast a recurring need for extra money, such as tuition payments, you may prefer a HELOC. A line of credit allows you to borrow when you need the money and, if you pay back the amounts you borrow quickly, you can save money over a second mortgage. You also need to consider your spending habits. If having another credit card in your wallet would tempt you to spend more often, then you are not a good candidate for a HELOC.

Once you make an initial determination about which loan might be right for you, you will need to discuss the details with your lender. While second mortgages usually operate in the same manner as your initial mortgage, lines of credit are different. Because they feature monthly payments, you will need to review the fine print carefully.

There is no shortage of lenders and offers for loans and lines of credit. Consider your needs, then shop around for a lender you can trust.

FHA loans offer many advantages to homeowners who qualify for these low-cost mortgages. Before applying for one, it helps to know what the requirements are, and how to improve your chances of getting approved without problems or delays.

The Federal Housing Administration (FHA), an agency of the federal government, insures private loans that are issued for new and existing housing, and loans that are approved for home repairs. Although the FHA doesn’t actually make mortgage loans to homeowners, it provides insurance to protect lenders. In other words, your lender accepts less risk with an FHA loan because it’s insured in the event that you default on your mortgage payments.

Benefits of FHA mortgage
* They help reduce the cash needed to purchase a home.
* FHA mortgage insurance costs are paid by the homebuyer, but they end approximately five years after you buy your home, or when the FHA mortgage balance is 75 percent of the property’s value.
* They have flexible payment schedules and rules regarding required monthly income, allowing more borrowers to qualify.
* If you don’t have lots of cash to use for your down payment, an FHA loan can help you buy your home.

To qualify for an FHA loan, you’ll need to have a good credit rating. Before applying for one, work to improve your overall credit score. If you have had credit problems in the past, the FHA recommends a consumer credit counseling program to avoid being denied a loan.

Qualifying for an FHA Loan
The FHA asks for a great deal of information on your loan application. For example, you’ll need to provide two years worth of:

* All addresses where you have lived.
* Your employers’ names and addresses.
* W-2 tax forms.
* IRS tax returns.

You’ll also need to provide your monthly gross income.

Gather all paperwork and documentation before you begin your application. This way, you’ll have everything handy and available to share. The FHA asks that veterans submit the DD Form 214-or official Armed Forces discharge paperwork-along with the FHA loan application paperwork. You can request the form online from the Department of Defense.

Never has this kind of lender reassurance been more critical than it is in today’s crisis-laden credit environment. If you qualify for an FHA loan, it may save you lots of money, and help you buy a home that you might otherwise not be able to finance with an ordinary loan.

Consolidate your loans
Most people have more than one debt. You may have high interest credit cards, loans and mortgages. To pay off one debt you may need to borrow from someone else, creating yet another debt. The solution to this problem is debt consolidation.

If you own a home, you can get a debt consolidation home equity loan. With a debt consolidation loan you will have to consolidate each of your high interest credit cards, as well as your consumer loans, into one inexpensive and affordable monthly payment with low interest.

Consolidate debt with home equity as security
A debt consolidation home equity loan is a secured loan where your property will be security against the loan. The lender will have a lien on your house until you pay off the home equity loan in full. While you’ll continue to own your home as loan collateral, the debt consolidation loan will keep the creditors away and keep you out of bankruptcy. You’ll be able to save a little, because the single monthly payment will be considerably less than the sum of the ones you had before.

The first thing to do once you’ve obtained your debt consolidation loan is to look over the use of your credit cards, so that you don’t use any of them in times of temptation, thereby increasing your debt. This will definitely put you right back in hot water.

Tax deduction and home equity loan consolidation
Another possible advantage is that interest you pay on your equity debt consolidation loan may be tax deductible. Normally, if you add your first mortgage to a new debt consolidation loan, and the total does not exceed 100% of the appraised value of your property, the interest you pay will be fully deductible. Your tax consultant can advise you on the matter, and it’s always a good idea to check with him or her.

An adjustable rate mortgage, often called ARM, has an interest rate that is not fixed. The interest rate varies based on one or many indexes. This could be to the one-year treasury bills or to another specific index. You may note that different lenders tie the adjustable rate to different indexes.

Examples of some quite common indexes are:

* Treasury notes and bills
* The Federal Housing Finance Boards National Average mortgage rate, which is an average rate for loans closed.
* The average interest rate paid on jumbo certificates for deposit.
It may also be based on the costs of funds for the specific lender.

Many of these indices that the adjustable rates are typically based on are published in the newspaper. Before going for an adjustable rate mortgage, check where you can find the published adjustments, if there are any types of sources for projections, and where the underlying index on which the adjustable rate is based is posted.

It goes without saying that the interest rates can go up or down. Therefore this type of mortgage loan can be a very viable option for people who are not too sensitive to fluctuating financing costs. Shopping for an adjustable rate mortgage can be more difficult than shopping for a fixed rate mortgage.

What are the advantages of an adjustable rate mortgage?
With a lower adjustable interest rate the monthly amount will be less. You may therefore qualify for a larger mortgage, or you may qualify for a loan easier. Lenders use your gross monthly income and your monthly mortgage payment to determine how much you can qualify for.

Given that you plan to stay in the home for a limited time period, a couple of years or so, an adjustable mortgage may be a great option. The main parts of benefits of an initial low interest rate will be gained during this period.

If current interest rates are very high, this could be the only loan choice available to you. But if you are risk avert, maybe this is not be the option for you.

The fine print of an adjustable mortgage loan
It is important that you study the details of the loan; below you find some of the basics and terminology explained. In summary when looking at an adjustable mortgage rate you should consider in addition to basic rate and index information:

* Initial rates
* Margins
* Adjustment intervals
* Rate caps and payment caps

Intial rate or teaser rate
The initial rate you are charged on the loan is generally lower than current interest rate. This can be an excellent way of purchasing a home you may not be able to get a fixed rate loan for, as the initial payments will be lower. As mentioned, when the bank is deciding how large of a mortgage you qualify for they base this on the monthly payments you can afford each month. Therefore a low initial rate on an adjustable rate mortgage can help you qualify for this type of loan but not for a fixed rate mortgage.

Margin
At the end of the initial rate term your interest rate will be based on the indexes specific for your loan. This index (or indices) is not the actual percentage interest rate you will be paying, but rather the basis on which they are calculated. In most cases some sort of a margin must be added to this to give the actual interest rate. This margin may vary. The index plus the margin will give the actual adjustable rate that the interest defaults to after the initial term.

Interval of adjustment
Be sure to ask for and understand the interval of adjustment for you mortgage. If the interval is one year, then the interest rate for the mortgage remain the same for one year and then changes in accordance with the index (and the margin). The mortgage rate will continue to adjust for the entire term of the mortgage.

Rate cap and payment cap
Besides margin and adjustment intervals, be sure to find out everything about rate caps. A rate cap is the maximum percent increase that can occur at each interval of adjustment. A payment cap is the maximum amount that your payment can go up at each adjustment interval.

Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.

Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.

Conventional loans are mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly know as Farmers Home Administration, or FmHA).

Escrow is the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

Fixed-rate loans generally have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan.

The interest rate is the cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions.

Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.

Lock-in refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.

A mortgage is a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan.

Overages are the difference between the lowest available price and any higher price that the home buyer agrees to pay for the loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra compensation.

Points are fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.

Private mortgage insurance (PMI) protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.

Thrift institution is a general term for savings banks and savings and loan associations.

Transaction, settlement, or closing costs may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a good faith estimate of closing costs at the time of application or within three days of application. The good faith estimate lists each expected cost either as an amount or a range.

As the name implies, a fixed rate mortgage is one on which the interest rate is fixed and set for the duration of the loan. In other words, the interest rate remains the same during the entire term of the mortgage or for a stipulated length of time. Fixed rate mortgages are the most popular ones and almost 75% of all home mortgages are fixed interest rate mortgages.

The biggest benefit of a fixed rate mortgage is that you will know precisely what your mortgage interest and principal payments are going to be and hence plan your budgeting in accordance.

By virtue of the fixed mortgage rate, you are secure in the knowledge that the interest rate is going to remain unchanged for the duration of the fixed rate mortgage. For example, the lender offers a 15 year fixed loan to the buyer of a home. He charges the purchaser 6% interest which is fixed and will not change for the entire term of the loan. Whether the market rate rises to 7% or decreases to 5%, the homebuyer will continue to pay the fixed 6% interest rate. Thus a Fixed-Rate Mortgage applies the same interest rate toward monthly loan payments for the term of the loan.

Characteristics of a fixed rate mortgage
1. It is simple and easy to understand in comparison to the Adjustable Rate Mortgages (ARMs).
2. It offers more security for buyers and is very commonly used by first time home buyers.
3. It is best suited for persons who like to know what their monthly budget for expenses is going to be and for those who wish to keep their houses for a longer period of time.
4. The fixed rate interest mortgages usually charge higher rates of interest than ARMs as the risk perceived by lenders is higher.
5. The Fixed rate mortgages usually have higher initial monthly payments compared to those of adjustable rate mortgages.
6. Fixed-rate mortgages have less flexibility than adjustable rate mortgages.

In the case of adjustable rate mortgages the interest rate is not fixed, but changes during the life of the loan. These changes are linked to an index rate and move in accordance to it. The Adjustable Rate Mortgage offers you the benefit of low initial rates and therefore you are able to afford more expensive homes. In a fixed-rate mortgage, your interest rate stays fixed for the entire life of the mortgage.

A home equity loan allows you as a homeowner to get a loan by using the equity in your home as collateral. The equity consists of whatever funds you have invested in your property in order to own it or improve it.

Since it is a debt against your own property, which you are in actual possession of, a home equity loan is a secured debt. The property can be required to be sold if the creditor wants the money back that you have borrowed.

Home equity loan vs. Home equity line of credit
A home equity loan can be obtained in a lump sum or used as a revolving home equity line of credit.

A home equity loan can be either of the following:

* A fixed rate mortgage
* An adjustable rate mortgage

A homeowner who requires more money in large amounts usually applies for a home equity loan. Some expenses that make a home equity loan useful are:

* Debt consolidation
* Home repairs
* Medical bills
* College tuition for family members

Tax benefits of home equity loans
A home equity loan is also beneficial because the home equity loan rate charged is usually tax deductible, as the loan is used for its primary functions. You can use our home equity loan calculator to check what various home equity loan rates will mean for your monthly payments. Always compare offers from several lenders and brokers to obtain the lowest home equity rate possible.

More information on home equity loans and rates

If you would like more information on home equity loan rates, and how to find the best home equity loan, please fill out the form above! Home equity loan specialists will get in touch with you to consider your options and see how a home equity loan can help you make the most of what you have.

There are several choices available for homeowners to free up the equity they possess in their homes.

When shopping for a second-mortgage, the options offered by lenders are so abundant and competitive, it’s sometimes more efficient and easy to use a professional mortgage broker. When shopping for a real estate broker, most homeowners are familiar with what to look for, because of past experiences. But many consumers have never needed a mortgage refinance broker before, and are not sure what criteria to use when choosing one.

Here are three questions to ask a potential mortgage broker to help you make a wise choice:

Question 1: How long have you been in business?
Many mortgage brokers work the same way that independent insurance agents do, by brokering deals between customers and lenders. Experience in the business is a plus, because it means they have an established network of lenders and a good working knowledge of how the mortgage game is played.

Question 2: How do you get paid?
Review the charges that you’re expected to pay, to ensure that they seem reasonable. After all, a hard-working broker who gets you a great refinance mortgage or home equity loan deserves adequate compensation.

But there are other fees that are sometimes listed on a closing statement, such as “POC” or “Paid Outside of Closing.” These can include bonuses paid by lenders to the broker for selling mortgage refinance packages that carry a higher rate. That could influence your broker to sell you something that you don’t want or need.

Question 3: Will you provide a commitment letter to lock in your rate?
Ask your broker immediately for a loan commitment letter from the lender when you lock in your rate. This helps to ensure that the broker doesn’t “sit on” the decision to lock, risking that you’ll lose your rate if interest levels jump overnight.

Ask your friends, your realtor, or a family member to recommend a mortgage broker with whom they’ve had a great experience. Shopping for a second mortgage or home equity loan can be overwhelming, but the services of a skilled and reputable mortgage broker can usually smooth the way. It pays to shop around.