March 17th, 2015 7:43 AM by Jackie A. Graves, President
How you pay back your
mortgage is arguably the most important aspect of the home-buying process. When
you’re loan shopping, you’ll come across a number of different
kinds of loans and payment options. Before you pick one, you should know how
some of the most common options work and consider which one best suits
Payments anyone can do
For most mortgages,
you’ll be able to make payments on your
loan in three common
1. Amortized payments
This is the most common type of payment. You make a monthly payment covering both the
principal and interest due. By the end of the loan’s term, your loan and
interest will be paid in full.
This monthly payment
can either stay the same, as with fixed-rate mortgages, or fluctuate, as with
2. Biweekly payments
One way to chip away
at your principal balance faster is to make biweekly payments. With this method, you pay once every two
weeks, which comes to 26 payments a year. This payment schedule can shave
a few years off a 30-year FRM and save you thousands of dollars in interest.
3. Extra payments
If you want to pay
more toward your principal, it’s your right to do so, and it’s a good
idea for those who want to stay put. Sending your lender a check with “for
principal only” written on it is one way to do this.
Some repayment options
are offered only with certain loans. The following loans are the most common:
FRM payments are
made once a month and are fully amortized. The interest rate is fixed and
the monthly payment amount never changes. The typical length of an FRM is
30 years, but it can be as short as five years and as long as
ARM payments can
change each month or each year, depending on the loan’s terms. Some ARM loans
have a fixed-rate payment period for several years before changing
to an ARM with fluctuating payments. ARMs usually come with a cap on how much
your interest rate or monthly payment can rise.
payments of ARMs can be difficult for some home buyers to keep up with.
However, ARM interest rates are usually lower than FRM rates. They can be advantageous
if you move often or don’t plan to see out the life of the mortgage.
3. Payment-option ARMs
payment-option ARMs give you a choice of how you want to pay on any given
month. They include:
Fully amortized payments (you pay both the
principal and interest due that month)
A limited payment, which might not cover the
interest or principal amount
This flexibility can
be beneficial or troublesome for borrowers. You should know how each payment
change affects the overall amount you owe on your loan.
4. Interest-only loans
offer an initial payment period in which you pay back only the interest.
Also, most interest-only loans are adjustable-rate, so your monthly payment can
When the interest-only
payment is up, you usually have three options to pay off the principal:
Pay it in full
Make monthly payments on the principal
This payment plan is
considered risky. The amount due each month decreases with each interest
payment, but when the interest-only period ends, the monthly payments on the
principal are larger. This can stress your financial situation if you aren’t
Some loans, called
balloon mortgages, require you to pay off the remaining loan in full after a
period (typically five to seven years) of low monthly payments. This type
of loan can get you into a lot of trouble if you don’t have a rock-solid financial plan, or can’t refinance, and want to stay in your
often come with lower interest rates and low down payment requirements. This
payment plan may be useful for those who don’t want to stay in the home long
term and instead plan to sell.
By: Craig Donofrio |
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