Getting good mortgage advice
Finding your feet in the mortgage market
The mortgage market can be a pretty bewildering place if you aren't used to it. There are just so many different types of mortgage: endownment mortgages, flexible mortgages, mortgages which seem to good to be true, and others so bad it's hard to believe anybody buys them.
If you're in the position of stepping out into this chaos for the first time, you'll need all the help you can get, to aid you in finding your feet, and in choosing a mortgage that is one of the winners rather than one of the lemons.
Where can you get that help? Well, you've made a good start by looking here. I'll be trying to give you some sound advice to get you looking in the right directions, help you find the right questions to ask, and point you towards the better deals around.
I can't do it all for you, though: whatever you read here about mortgages, check it against what you know. Talk it over with your friends and family - people who have often bought mortgages themselves, or maybe even have chosen not to.
Some questions to ask about mortgages
Half the problem when you're looking for a good mortgage deal is knowing the right questions to ask. Even if you find the most crooked, self-interested lender out there, he or she will be under a strict legal obligation to tell you the truth about financial matters, and about the costs and benefits of a mortgage or other financial deal that you enter into. Know the right questions to ask, and you can pin them down into giving you the information they might not want to volunteer.
Now, you might be hoping that I have a pre-prepared magic list of questions to ask about your mortgage. I don't - it simply isn't possible for me (or anybody) to come up with a set of mortgage questions that capture the essence of your personal situation. What I can do is point out some areas that you'll want to look at, and help you think through areas to write your own list of questions
What are the penalties?
Mortgages will last for a long time - 25 years is typical - and so it is pretty likely that your circumstances will change over that time, and you'll want to adjust your mortgage in some way. So when you go into arranging your mortgage for the first time, you should look into the costs of moving out of when you need to change your terms. Will penalties be imposed on you if you try to change the length of repayments? Is it easy for you to pay off your mortgage in a lump sum, and go off to a better deal elsewhere? Are there fees and charges which you'll be expected to cough up on closing the mortgage? If so, is there any way that they can be mitigate?d
ARMs and FRMs
Herds of mythic, unpronounceable acronyms roam across the savanna that is the mortgage market, and chief among them are the ARM and the FRM. To survive, you will need to understand them, and how to deal with them. The ARM is the 'adjustable-rate mortgage'. This is a mortgage with an interest rate that varies according to the economic climate. In the United States, for both legal and historical reasons, they are generally set as an agreed adjustment to the base rate. This makes the ARM in America a slightly less risky deal than its counterparts in other nations, where the rate charged can be adjusted almost at the whim of the lender. In the USA you are subject only to the whim of the economy and the Federal Bank, not to the whim of private bankers as well.
Even with that proviso, the ARM is more fickle and unpredictable than the FRM. This latter, the 'fixed rate mortgage', restricts both you and your lender to an interest rate agreed when you take out the mortgage. But even here you can't usually have complete security (unless you are willing to pay substantially over the odds for it): fixed-rate mortgages are usually available only for a period of a few years, after which the rate will have to be renegotiated.
Tracking the base
Because of the variation in interest rates, it can be hard to analyze and compare different adjustable-rate mortgages. There are several different schemes by which the price of a mortgage can change depending on the base rate. COFI (coffee) is one of the most common. This is the 'cost of funds index', and historically it has a reputation for changing less dramatically and suddenly than othe rindexes, such as the 'treasury one-year constant maturity series'. The details of these systems can be found online, and you should closely look at whichever index your lender uses as a basis for setting their adjustable-rate mortgages. To compare lenders basing their offers on different indexes, you may need to use a figure such as the FIR. The FIR will tell you the rate being charged at present - that is, the combination of the underlying index with the lender's fees and profit margin.
Mutant Hunting
There also exist hybrid forms of mortgage, mutant offspring of the fixed-rate mortgage and te adjustable-rate mortgage. One of the more prominent is the adustable-rate mortgage with a conversion option. This is, as the name might suggest, an adjustable-rate mortgage which includes the option to change it to a fixed-rate mortgage at some defined time in the future - usually at a high cost. It is yet another way for the borrower to take away some of the risk he or she faces from changing interest rates - but the premium paid for having a conversion option is rarely justified by the use to which it is put. So for most borrowers, a conversion option is not of much use - unless it is for some reason being offered ata very low price, you should probably only take it up if you have some reason to believe you will need to use it.
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