Mortgages Come in All Shapes and Sizes

Know your Mortgage Terms

Sometimes it may seem that the lending industry professionals have their own language. You've probably seen some of the terms specific to the mortgage business, and you undoubtedly know the meaning of some more than others. To begin with, if you are in the market for a mortgage loan, it's crucial to at least understand the basic terms that describe the different types of mortgage packages available to you. Here, we've broken down and simplified some of the most common terms that create the most confusion in mortgage customers.

These particular terms describe some of the riskier aspects of loans, and depending on your situation, you may want to avoid loans that incorporate these items. For some borrowers out there, however, these riskier aspects have certain attractions, so they do make sense for a few out there. As with everything, only you know your circumstances so only you know what's best for you. Read up on these terms, and decide for yourself.

Interest Only Loans

These are more and more common these days, but that doesn't mean it's wise to get an interest-only mortgage. The attraction is that the borrower pays very small monthly payments in the beginning, since no principle is being paid. The shocker comes when the honeymoon ends and you have to start paying down that principle. Find out how large your monthly payments will actually get at this point, so you can prepare for the end of the honeymoon. Some people think interest-only loans are good if you know for sure 100% that you will sell the property quickly, before the honeymoon runs out, you know the value will not fall, and it helps if it's your primary residence, too. That's because you'll end up paying very little money for your home, and get out before the monthly payment shoots up into the sky.

Stated Income Loans

A stated income loan is a loan where the borrower doesn't have to prove income. That is, the borrower won't have to submit tax forms, paystubs, or any other documents...not one piece of paper at all. The income is simply stated on the mortgage application, hence the name. This is an ideal type of loan for the self-employed or the independently wealthy, or anyone with a non-traditional source of income. The caveat is overstating your income and getting in over your head. Borrowers are tempted to overstate their income so they can borrow more money. Don't do this. Your potential lender won't check your income tax returns, but if they sell your loan to another mortgage company, that new company may audit your files. Then you have a headache because it's a crime to lie on your mortgage application! But for those borrowers out there with non-traditional employment situations, and who can manage their money wisely and not get greedy, the stated income loan can be a blessing.

Negative Amortization

Some lenders may offer you an Adjustable Rate Mortgage (ARM) with monthly payments that are very very very low. They've done this to make the loan package competitive and attractive to you to get your business. However, what you must know is that the monthly payments on such a loan can be too low. That is, they won't cover the cost of the actual loan each month, so the lender tacks on the extra amount to your loan amount. What you're not paying now, you'll pay for later. With interest!! There really aren't many situations where this is a good idea, unless, like the Interest Only loans, you know the value of the property will keep, and you know you'll sell quickly. However, as with the Interest Only loans, even under these circumstances the risk may not be worth the gain. Ask your lender if your loan package allows for negative amortization and avoid it at just about all costs.

Prepayment Penalties

Nobody knows what the future holds. You may plan to stay in your new home for decades, but you can't control everything. Your job may get transferred, you might get a divorce, or you may land a windfall of money. All of these events might result in your wanting to sell way before you'd planned on in the beginning, when you chose a loan package. Some loans have a prepayment penalty, which means if you pay off the loan before a certain amount of time has passed, you have to pay a fine! Again, as with all these risky loan terms in this section, for some borrowers there are advantages. A loan with a prepayment penalty might be great for some, who accept this risk in return for lower interest rates. It's your gamble, your decision. Whatever your personal situation, be sure to ask your lender about prepayment penalties, and if there is one, make sure you're getting something for it.