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Introduction

The purpose of this book is to help secure the loan that is right for you. Your circumstances — credit history down payment; and other factors — will determine both which type of loan is best for you and the cost of the loan. You will also learn ways to do the research that will help you make your decision.

This book covers the major loan options available to borrowers; and describes who will benefit most from each. When you find the type of loan that fits your circumstances; you can be confident that you are going to get the best loan for you.

Finding the best lender for each type of loan is also discussed. You will learn the things you should do on your own, as well as the questions you should ask potential lenders or mortgage brokers before agreeing to accept a loan. You do not want to be in the position where you find the best type of loan for you; and then find yourself working with a lender who overcharges you. Different types of mortgage loans emphasize different areas of the loan. For example; one may be designed to make the monthly payment as low as possible. Another may feature the lowest possible interest rate. Still another may be attractive because of the low down payment. There are many variations.

However, all loans have certain things in common. The borrower must make a monthly payment, pay interest on the money borrowed, and pay back the loan at some future date. Because of these common elements, there may be some repetition in describing and examining each type of loan. Unless specified, all information refers to loans made by so-called institutional lenders, such as banks, savings and loans institutions, and credit unions. Loans made by individuals, such as sellers of property, are covered separately.

Risk and Profit

Before getting into the specific types of mortgages, it is important to understand the basics of mortgage lending. The two intertwined factors that control the lending industry are risk and profit.

Risk determines the cost to the borrower. The higher the risk to the lender, the higher the cost to the borrower. If the borrower is willing to take on more risk, the lender will reduce the cost of the loan. Cost can be in the form of the interest rate, fees, or both.

There are the obvious risks. A borrower with poor credit, marginally acceptable income, high debt, or little or no down payment creates a higher risk that the loan will not be repaid. A borrower with any of these problems should expect to pay more to borrow money. Another type of risk is in the stability of the mortgage interest rate. If the borrower insists that the interest rate on the mortgage never increase, called a fixed interest rate mortgage (FIRM), the borrower will pay more for the loan. This type of loan puts the risk on the lender, because if the interest rate increases several years after the loan is made, the lender could potentially lose money. If the borrower is willing to accept the risk that the interest rate may increase, called an adjustable rate mortgage (ARM), the borrower will pay less for the original interest rate of the loan. As you read on, you will see how much risk you as a borrower should shift from the lender to yourself.

Lenders believe loans that put them at greater risk should return a higher profit than safer loans. This seems reasonable. The borrower's job is to find a lender willing to take the smallest amount of profit for the particular loan that the buyer wants. Again, not an easy task.

Profit for the lender comes from interest, points, and other fees. If a mortgage broker is involved, his or her fee can be paid by either the borrower or the lender. If paid by the lender, the borrower will then pay a higher interest rate to enable the lender to recoup the money. Some loan programs are simply more profitable than others. This means that a lender may try to sell you a loan that is a good deal for the lender, but not for you. Since lenders know much more about loan programs than borrowers, borrowers tend to start off with a major disadvantage. Part of what you will learn in this book is how to lower the odds against you and find the mortgage loan that you want, not just the one the lender wants you to have.

Gaining a general understanding of the mortgage industry, as well as specific knowledge of the loans currently being offered by most lenders, should give you the ability to avoid the hype and concentrate on the truly important features of the loan you are being offered. Once you can do this, you can get a mortgage loan that will be best suited to your situation.

 
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