In general, the structure of your loan will fall into one of three basic categories. However, there are many hybrids and combinations of these structures available. Your Bank of the Ozarks Mortgage Lending Professional will help you figure out which is best suited for you.
- Fixed Rate - the interest rate remains the same throughout the life of your loan, usually for a 15- or 30-year term. The fixed-rate loan provides protection against rising interest rates because your rate is set for the life of the loan. This means that your principal and interest will always be the same each month. The fixed-rate loan is best for people who are on a fixed or limited income, those purchasing a home during a time when interest rates are comparatively low and/or those who plan to stay in their home a long time.
- Adjustable Rate (ARM) - the interest rate and your monthly payment can change during the life of the loan. ARMs usually offer a lower initial rate for the first one to 10 years and then may change at pre-determined adjustment intervals usually every six months or one year based on financial market conditions. The ARM is a good option for those who expect to earn more in the future and/or expect to sell or refinance before the end of the initial rate period.
- Balloon loans - are short-term mortgages (usually five to seven years) with a fixed payment during the term of the loan. However, unlike the 15- or 30-year fixed-rate mortgage, balloon loans do not fully amortize over the original term. At the end of the loan term, there is still a remaining principal loan balance due as a single "balloon" payment.
Mortgage rates are set by global financial markets through their bond trading activity and, therefore, generally rise and fall along with Wall Street securities. When shopping for a mortgage, you will have a better chance of obtaining the best possible interest rate if you know the current market trend.
When comparing interest rates, make sure you are getting a true comparison by looking at the Annual Percentage Rate (APR). Mortgage companies are required by the Federal Truth in Lending law to disclose the APR when they advertise rates.
There are many factors that contribute to determining how much interest you will pay on your mortgage, including:
- Your credit history and credit score. A good credit history shows lenders that you are willing and able to make your mortgage payments. It is a good idea to check your credit report to make sure there are no errors prior to applying for a mortgage. Learn more about credit reports and credit scores.
- Amount of down payment. Although it is possible to receive a low- or no-down-payment loan, the interest rate on these loans is likely to be higher. The larger the down payment you are able to make, the better the loan-to-value ratio becomes and the better your interest rate will be. In addition, you will borrow less and pay interest on less money over the life of the loan, making for a lower monthly payment.
- Term or length-of-time payments will be made on the loan. Shorter loan terms, for example 15 years versus 30, will save you thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher.
- When possible, you should pay closing costs up front instead of wrapping them into the mortgage, or you will pay interest on a few thousand dollars for the loan's full term.