 TITLE: How to Shop for a Mortgage CONTENT: Understand How Mortgages Work\n-----------------------------\nA mortgage allows you to borrow the funds needed to purchase a new home. Most mortgages require you to make a down payment, usually at a minimum of 3% to 5% of the sale price, depending on the type of mortgage loan. Many buyers aim for a 20% down payment, but the amount you put down will depend on your unique financial situation. The amount of your mortgage is determined by the difference between your down payment and the purchase price of the home. You will also be responsible for paying closing costs and fees that typically range between 2% and 5% of the purchase price.\nMortgage terms can vary, but are commonly either 10, 15, 20 or 30 years. During that time you will make monthly payments to the lender to cover the following:\n*   **Principal**: This is the loan amount not including interest or what's already been paid off.\n*   **Interest**: The finance charge on the loan, interest is based on the annual percentage rate (APR) charged by the lender.\n*   **Escrow**: The escrow account holds a pool of money that is used to cover homeowners insurance, property taxes and other costs when they are due. You may also need to pay for mortgage insurance if your lender requires it.\nDuring the repayment period, the deed to the home remains in the lender's possession. When you pay the mortgage in full, the lender will transfer the deed to you. If you fall behind on your payments and eventually default on the loan, the lender has a right to foreclose and take possession of the home.\nHere's a breakdown of the different types of mortgages and how they work.\n*   **Conventional loans**: These mortgages are offered by banks, credit unions and other mortgage lenders. Conventional loans are not backed or insured by government agencies. They may be sold to a different lender within a few months of closing.\n*   **Government-insured loans**: Backed by government agencies, these loans are originated by private lenders but offer solutions for would-be homebuyers who might not otherwise be able to be approved for a loan. They include FHA loans, VA loans and USDA loans.\n*   **FHA loans**: These loans are insured by the Federal Housing Administration (FHA) and allow a down payment as small as 3.5%. You may be able to qualify for an FHA loan if you have a low income or less-than-perfect credit. Qualification criteria for these loans are less stringent than what you'd find with conventional loans.\n*   **VA loans**: Loans through the U.S. Department of Veterans Affairs cater to members of the armed forces and their families. If you qualify, you could get approved for a mortgage without a down payment.\n*   **USDA loans**: This loan is designed for low-income borrowers who plan to purchase a home in a rural area. No down payment is required.\nNo matter what type of mortgage you get, the interest rate will be a major deciding factor. However, it's important to understand that mortgages will fall into one of two broad categories that determine whether or not the loan's interest rate can change:\n*   **Fixed-rate mortgage**: Your loan's interest rate will remain the same over the entire loan term. These mortgages provide more predictability for your monthly payments, but they might result in higher rates compared with the alternative.\n*   **Adjustable-rate mortgage (ARM)**: These mortgages come with an interest rate that can fluctuate. Generally, your interest rate will be fixed at the beginning of the loan term and then change annually with market rates. The frequency with which the loan rate can change is expressed with a fraction such as 5\/1 or 7\/1. With a 7\/1 ARM loan, you will have a fixed rate for the first seven years, after which the rate can change annually. Some buyers prefer these loans since they can provide a lower interest rate during the initial fixed period compared with fixed-rate loans—but they are riskier because you don't have a guaranteed rate locked in for the life of the loan. END