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Navigating The Complexities of Mortgage Financing
Navigating The Complexities of Mortgage Financing
By: Bill Williams, Vice President

The word mortgage derives from the French words mort, meaning dead, and gage, meaning pledge. And originally, a mortgage was just that - a pledge to pay for your property for the rest of your life. Thankfully, mortgages today do not necessarily require a lifetime of payments or obligation. There are multiple vehicles and alternatives that allow this flexibility; however, increased alternatives often mean increased decision-making, which can make the path of mortgage financing difficult to navigate.

The reasons for obtaining a mortgage have also changed over the years. Traditionally, you obtained one mortgage during your lifetime to purchase your first and only home. Today, a young couple may obtain a mortgage to buy their first "starter" home. Often, that same couple then obtains another mortgage to move up to a larger, more expensive home. And "empty nesters" are now downsizing and using mortgage financing to purchase a comfortable home for their retirement years. Each scenario has different financial requirements and mortgage financing has evolved over the years to accommodate these changes.

Mortgage financing is also being used for reasons other than strictly purchasing a home. Such financing can be used to accomplish an array of financial planning objectives that exist well outside traditional applications. You may want to unlock the idle equity in your home for investment purposes, to make home improvements, or to consolidate your debts. Some use their home equity to finance their children's education. The purchase of an investment property or vacation home may be another reason to seek mortgage financing. And the interest you pay on a home equity loan can be deducted for tax purposes, which enhances the decision to borrow against your home. (Please consult your tax advisor regarding deductibility.)

Choosing The Right Mortgage For You
Once you've decided that you need a mortgage - whether to purchase a home or to tap into the equity of your existing home - you must then decide which type of financing is right for your situation. This is where the multiple alternatives come into play. Do you want a conventional mortgage or one that is backed by a federal agency, such as the Federal Housing Administration (FHA loans) or the Department of Veteran's Affairs (VA loans)? Government-insured mortgages may be more attractive than conventional mortgages in some ways, such as lower down payment requirements; however, they may be more restrictive in other ways. For example, they may be available only for certain kinds of homes or for properties whose value is below a specified price.

The interest rate of the loan is another important factor to consider. It may seem that the obvious choice is to select a mortgage from the lender with the lowest rate. The pitfall to this popular, yet flawed, tactic is that you may end up with a great rate on a program that does not meet your needs. The key is deciding which type of interest payment makes the most sense for your situation. Mortgage loans offer two types of interest rates: fixed rates and adjustable rates.

A fixed-rate mortgage is the most popular mortgage. It offers an interest rate and a monthly payment that remain the same over the life of the loan. This is appealing to many buyers because it brings certainty to their monthly budgets. On the downside, your payments will not drop when interest rates do. The most popular fixed-rate mortgages are for terms of 15 and 30 years. However, most lenders will also grant 20 and 40 year mortgages as well.

An adjustable-rate mortgage is riskier than a fixed-rate loan. The interest rates on these types of loans change periodically. If interest rates rise, so do your monthly mortgage payments. However, if rates drop, you save money with lower payments. Most adjustable-rate mortgages have caps that limit increases to a certain amount, usually 2 percent at each adjustment and 6 percent over the life of the loan.

Other important decisions to be made are the length of the loan and the down payment required by the lender. Mortgage terms can range from five to 40 years. Adjustable-rate mortgage terms usually run for one, three, five, seven, or 10 years. With a fixed-rate mortgage, the longer the term and the larger the down payment, the smaller your monthly payments will be. In some cases, the amount of the down payment will influence the interest rate that you pay.

Given all of these alternatives, you will be best served by working with a mortgage lender who will determine, through a careful and deliberate process, which vehicle provides you with the advantages you seek to enjoy. There are many aspects of your life that will determine the best product for your selection and they are determined in large part by the following considerations:

If any one of these considerations is not included in your selection process, you could end up with a loan product that does not serve your needs. Don't hesitate to ask your lender how one loan differs from another and how the different features of the loan will affect the mortgage. The best way to secure successful financing strategies is through a process where all of your financial circumstances are considered. Understanding the mortgage process will help you manage one of the largest investment choices you will be faced with in your lifetime.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

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