When you send in your monthly home loan payment, part of it goes to pay the bank its interest, and part of it is used to pay down the loan. This was how all mortgages were until now. A new type of mortgage has been designed to allow the monthly mortgage payment to be as low as possible, by requiring only the payment of interest.

This means that if you choose an interest only option, each month you pay your mortgage, the loan balance stays just the same; it never gets lower. Just about all mortgages allow you to pay off a higher balance than the minimum, and interest only loans are not different; you can pay more if you prefer.

This loan had its place when housing prices were escalating, since even if you never paid down part of your mortgage, you would still have plenty of equity because of the home?s increased value. It used to be that homeowners accrued equity by paying off some of the loan, and by the added value of the house.

Today?s falling housing market means that homeowners can no longer depend on an automatic increase in their home value. There may be some cases where interest only loans can work. But these cases should only be temporary situations.

One example could be when a two income family temporarily only has one income, for instance if one of them was going to school. Since, in theory, the student would eventually complete school and get a good job, keeping the mortgage payment low during this period and ramping them up afterwards makes sense.

Another case might be that of a wage earner with sporadic income that changes from one month to the next. Perhaps someone who worked on big projects and was only paid at the completion of them might have such a pattern. While the project is ongoing, it is best to keep payments as low as possible, a need the interest only loan could meet, and then when income comes in, higher payments can be made.

But in any of these cases, the homeowners cannot count on the price of the home rising and has to make sure principal payments are made. Using a traditional loan mechanism, if the home value is lower, flat or only increases slightly, the margin of equity that the homeowner deposited will cover the difference. However, if you always choose the interest only option, the mortgage principal will never be lowered, and the amount received by the sale of the house will not be enough to pay off the loan.

Of the many decisions you try to make correctly when you are deciding on a mortgage, timing the interest rate may be one of the biggest. Will interest rates go up, in which case you should lock in a fixed rate mortgage for as long as you can, or are they headed down, which means you should either put off buying or refinancing, or choose a rate that adjusts frequently?

How are these interest rates determined in the first place, and will understanding this help in the decision making process? Interest rates are actually the price of money, and just as the law of supply and demand dictates price, the law of supply and demand will influence the price of your mortgage: its interest rate.

The first factor to lood at regarding interest rates is the inflation rate. The inflation rate has two major indicators. They are the PPI and the CPI, the producer price index and the consumer price index.

PPI or Producer Price Index is a measure of the change in prices at the level of production. If the prices of raw products go up, you can be sure prices in general will go up.

CPI, or Consumer Price Index is the difference in prices at the consumer level, as determined by a standard basket of consumer merchandise. Most people are more familiar with CPI because it more directly affects what they pay for goods. Often, to remove some of the volatility of the CPI, analysts examine core inflation, which eliminates energy and food prices from the formula. What remains is considered the ?core? inflation rate which is a superior indicator of general prices and inflation.

GDP is another relatively good predictor of inflation and interest rates. The Federal Reserve Bank tries to maintain the economy on a even level, with neither too much nor too little growth, which respectively result in inflation or recession. The Fed therefore intervenes and when the economy is growing too fast, it will raise interest rates to slow the economy down, or conversely, lower interest rates to stimulate the economy for increased growth.

Another important indicator is the unemployment level. Low unemployment is considered inflationary since employers have to chase after too few candidates, and will raise wages to do so. If unemployment is high, the resulting lower wages will mean lower inflation. This is called the wage price spiral; higher wages lead to increased prices, lower wages to lower prices.

If you are considering a loan, it is to your advantage to watch these indicators to target the best timing to enter the loan market. Normally, a slow economy with elevated unemployment will mean that rates will be falling. Growing GDP and low unemployment can signal a faster growing economy and rates will probably be increasing.

Worrying about what kind of mortgage you want to take is hard enough, without having to decide on which interest rate index is going to be the deciding factor on what your interest rates on your Adjustable Rate mortgage will be!

When we speak about the index for the ARM, we are talking about the instrument that the adjustments to the loan rate will be tied to. Various indices are used, including government treasury instruments, the Fed Fund rate or LIBOR.

The rate on an ARM is adjusted periodically upwards, or downwards, based upon the movement in the general interest rate environment, but tied to a specific instrument. One such instrument would be Certificates of Deposit-your loan rate would go up and down with the CD rate. ARMS also contain adjustment caps, so that you can limit your exposure as to how high your mortgage rate can go, even if your index rate continues to go up, which is good if you just had a change, and the rates go up again. But be aw are, however, that if you just readjusted at an increased rate, and your index rate goes down, you are stuck with the increased rate until the next adjustment period.

There are a large number of ARM indices, including the CDs, LIBOR and government bonds mentioned. The Fed Funds interest is the most used index for ARMs. LIBOR is the London Interbank Offered rate, which is a rate that commercial borrowers pay each other for the use of funds.

Which is the right choice depends on your situation circumstances and your view of where interest rates are heading. CD ARMs adjust every six months, for example, and therefore react more readily to interest rate changes. Adjustable rate mortgages that use T Bills will adjust more slowly. LIBOR is one of the quickest moving indices, so if you want to take advantage of quickly falling interest rates, this is the one to use.

But in addition to these standards, new products are always been put on the mortgage market; an example would be the option ARM, that will let a borrower decide how much mortgage he is going to pay each month! There is a minimum payment that covers the interest (so the bank gets its money) and then the other options will pay off some portion of equity. Be warned that minimum payment option can end up in an increasing, rather than decreasing mortgage, a phenomenon known as negative amortization.

This is a lot of information for the borrower to digest, and the best solution is to consult with a professional mortgage broker who can explain it all and recommend the best course for you.

Gone are the plain vanilla days of old fashioned mortgages; today’s mortgages have more flavors than Baskin Robbins.

One of the primary decisions you will have to make is whether you prefer a fixed rate mortgage or an adjustable rate mortgage. A fixed rate mortgage will usually be at a higher level than a variable rate loan. There is always a chance of the rates going higher, increasing the bank’s cost of funds when they fix a rate for a long period. So they try to earn more interest at the outset.

In many cases, a fixed rate mortgage is a better choice because of the interest rate protection it gives the borrower. They are not the best deal, however, if you do not plan on owning the home for too long. It will take at least five years to level out the higher initial interest rates.

Anyone who believes they will be in a home for less than 10 years is likely better off with the lower, adjustable rate home loan. The monthly mortgage will be lower with an adjustable rate mortgage, and even though you have the risk of higher rates, you would have that when you sold the house anyway.

To confuse the borrower even further, he now has to choose not only whether he wants a fixed or variable rate, but also the index upon which the rate will be determined, and what the interest rate cap and maximum interest rate will be.

Another choice to make is whether, and how long you want a lock in period. The lock in period means a given rate for a fixed time. The longer the lock in period, the more the interest rate will be.

Another choice in the home loan process is how much deposit to make. Most people put down whatever they can get together to qualify for the mortgage. In some cases, however, those with cash to spare may have to make the comparison between the benefit of a higher down payment with the option of earning interest with another investment.

A borrower will also need to decide on the points he wants to pay to lower the home loan loan rate. Paying beginning points will not be worth while if the loan is not going to be outstanding for a very long time.

Choosing among all of these options can literally make your head spin. And new choices are on the market all the time, such as interest only loans and option based loans, adding even more confusion to the home loan process.

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There is not a great deal of difference between first and second mortgages except that one is normally taken out when a home is purchased, and the second is taken out on the remaining balance of the first home loan.

Second mortgages are usually obtained to perform some substantial improvement to the home, but frequently homeowners decide to use the increased equity in their home to take out a second mortgage and pay down consumer debt.

If you are improving your home to such an extent that it will substantially increase the value of the home, a second mortgage is probably a worthwhile decision. Certain home improvements are said to be especially helpful in increasing the value of a home, such as an additional bedroom or an upgraded kitchen.

Taking out a second mortgage to install an in ground pool may not be the best use for the funds, since a luxury item like this may not necessarily add to the value of a home.

Many credit advisors recommend using a second mortgage to those consumers who are paying high interest rates on consumer debt. Replacing 16 to 20% debt on your credit cards with 5-9% debt on a second mortgage really does make a lot of sense.

But be sure you use the loan for its intended reason, and don’t “forget” to pay down those expensive credit card loans.

Since a first mortgage is paid off from the proceeds of the home in case of default, there may not be sufficient equity in the home to pay the second mortgage, and this is the risk the second mortgage lender takes.

Therefore, second mortgages will have a higher interest rate than first mortgages. The bank granting the second mortgage will have a higher risk that the loan will not be paid, and increased risk is one of the most important determinants of interest rates.

There are closing fees associated with all mortgages, but the closing fees for second mortgages are typically higher than for first mortgages. Be conscience of all of the costs so that you can compare it to the benefit you plan to receive (the amount of increased home value, or the savings on credit card debt.)

When it comes to second mortgages, you should shop around, both for the best mortgage rates and for the lowest closing costs, which make up a larger part of the loan in a second mortgage.

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If you have ever purchased a home, you may have had a shock when you saw the total of the closing costs. Frequently, people may be tempted to re-negotiate their older, higher rate mortgage when rates come down. It is important to consider this carefully and be sure any savings you have are not eaten up by the closing costs on the loan.

You would anticipate that the lender to charge something for creating a new mortgage. Many of these expenses are not under the control of the bank, but are simply passed along to it. There are, however, some fees that the bank itself charges, and therefore can change. And they do change them. In certain lending markets, banks may eliminate application fees, for example, in order to generate more loan business.

or inspections -Title search -Credit report

Or more, depending upon the state.

One of the first questions you may ask is whether or not you can reduce these costs. As we mentioned, there are times when lenders are aggressively seeking new clients, and they may have special programs where certain fees are waived. The application fee is the most often waived, since this is a charge the bank itself makes. Other fees, that are just pass-through fees, such as attorney fees or appraisal fees are not likely to be waived.

First of all, make sure the bank gives you a good faith estimate of these fees (they are required by law to do so.) Be careful that your bank has not offered you a great loan rate, but then padded the closing costs to such an extent that they recover the difference.

One of the best ways to get fees lowered is to learn the closing costs at your bank’s competitors and you can ask your bank to lower them if they are too high.

Now that you know how much you have to pay, you have to make sure it is worthwhile to re-negotiate your current loan. You can obtain a mortgage calculator on many sites on the net, and it will tell you how much the loan is going to cost over its life.

To the total cost of the new loan, be sure to add the closing costs, since you will not have them if you stay with your present mortgage. Now you can decide if it is worth re-financing your home.

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You may be concerned about the rate you are going to pay on your mortgage, but you don’t understand how the rate is fixed, and if there is anything you can do about it.

There are some factors that determine the interest rate that you can control, and some that are completely out of your control. It is a good idea to know the difference.

The one item that has the most influence on the level of the interest rate is the credit standing of the borrower. If you have heard discussions, or seen constant ads on the net about your “FICO” score, you may now what the buzz is about.

If you have been curious about what a FICO score is, it is a number that credit companies assign to a person’s credit standing. Banks all use the services of these credit rating agencies to find out the probable risk of lending to a borrower and the criteria the agencies use are history of payments, exposure to debt, income, job history, etc.

The next determinant that will influence your interest rate is the size of the down payment you are putting on your home.

First of all, you are putting your own money into the project; this gives the bank confidence that you are confident enough in paying back the mortgage that you have committed sizeable upfront funds as a down payment.

So a higher deposit will result in a lower rate. It is always a difficult decision about waiting and saving for a larger deposit, while wasting money on rent that could go for a mortgage. But a higher interest rate can make your mortgage payments more than your rent, so think about waiting to accumulate a good.

The next factor that will be used to determine the rate is the length of the mortgage. If a bank has to commit for an extended length of time at a fixed rate, they will want to protect themselves by making the rate higher.

This is why you will typically see short term loans at a lower rate than a 25 or 30 year mortgage. The downside to this concept is that, if rates are on the rise, you will have to pay more each time you renew your short term mortgage, instead of having a steady rate for 25 years.

Economics is another determinant that determines interest rates. Banks have to get their money from other sources, so the more they have to pay to obtain money, the more they have to pay to lend it. If general interest rates are going up, mortgage rates will rise. Whether interest rates will go up or down is a topic under constant study and discussion by economists.

But despite the fact that rates can come down, most people prefer not to take a risk and would rather fix a loan rate for a longer period, then to be constantly exposed to increased rates on short term loans.

A final factor is the size of your mortgage. There are limits that most banks have on the level of the loans they can have in their portfolio, and if they have to have larger ones than that, they will impose a penalty in the form of an increased interest rate.

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Many borrowers are not aware, but they can choose a payment option for their mortgage that makes it easier to pay because it suits their needs. The more you can tailor your mortgage to your personal requirements, the better the chance that you will pay your mortgage on time.

There are many borrowers who don’t pay their home loan on time simply because they are too busy and should look into online banking or automatic payments. This is only an option for those who are not having issues paying, just finding the time to pay because of too much travel or work time.

There may even be an additional benefit, if you deal with a bank that offers you a better rate for automatic monthly deduction. Banks offer this feature because they can process the mortgage payment more cheaply and because they are more likely to get the payment.

Other homeowners may budget the monthly payment but then find the account short when they have to pay the mortgage. If you get paid every other week, it may be difficult to make sure the money is still available for the mortgage when the second check in the month arrives. Many homeowners would rather to pay half their home loan at the beginning of the month, and the other half at the middle of the month.

This is frequently a painless budgeting method since the funds are “out of sight, out of mind” after the first payment is sent. In addition, they can save money over the life of the loan since they are reducing the loan balance more quickly than they would with the usual monthly payment.

Banks also offer option loans that let the borrower decide how much he will pay. This can be a great convenience, but it can likeswise be a very dangerous thing if it is not managed correctly. There is normally a minimum payment due which is the amount of the interest due, and then the homeowner pays anything (or nothing) above the interest. Making the minimum payment too many times will mean that you will never have the chance to lower your principal.

This can be a good solution for earners with fluctuating income patterns, such as a person who works on projects, or a building contractor who gets a lump payment on completion. But the borrower has to have the discipline to pay enough extra on the mortgage when the big payment does arrive.

Banks have been cutting their home loan portfolios back, that is for sure, but the careful borrower can still locate a mortgage.

Smaller, community focused banks are still very active in the home loan business. That small banks are doing this should not be that much of a surprise. The beginning of the mortgage business was really small building and loan societies that funded local expansion with local investments. These banks may no longer be called by the same name, but they are doing the same thing, staying local, and this has insulated them from many problems.

They are still issuing mortgages in an around their community, the community they know, and in many areas are filling the gap left open by the big lenders who are now gone.

While major banks project reduced loan volume in all categories, including mortgages, community banks expect stable numbers in loan volume for single family homes, but no increases.

But there are still many organizations, community-development banks, credit unions, and other institutions that are not only still lending, but lending to sub prime customers, because they are involved in shoring up the communities they are located in. These companies are not only staying in business, they are making a profit on their loans.

A good example is Shorebank of Chicago, a $2.3billion asset bank which is active in the low income community of this city and, compared to the national average of delinquencies of 18.7%, has only 3.1%. Since they are dealing with sub prime customers, their rates are higher, and they are extremely careful about how they manage their portfolio. They strive to be profitable, but not to be involved in “profit maximizing” according to Mark Pinsky, CEO of Opportunity Finance Network, an umbrella entity for community development finance institutions. Reading between the lines, profit maximizing may be understood to mean the greed that has been one of the foundations of the financial markets’ current woes.

A case in point: Angelo Mozilo, the CEO of beleaguered Countrywide Financial, had a salary in 2007 of $22.1million, while Douglas Bystry, CEO of Clearinghouse CDFI received a salary of $190,000. The location of Shorebank is a modest renovated movie theatre, not an expensively built corporate complex.

This breed of sub prime lenders are committed to the community and so to the loans they make, and instead of merely originating the loans and reselling as most major lenders do, they use initiatives that help insure the loans will be paid. Shorebank, for instance, runs an energy conservation program because they realize that the home loan is more likely to be paid if the homeowner can afford to pay his electric or heating bill.