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Explanation of popular types of loans

-- Credit Tip by FindLocalBanks.com
Federal law requires that all creditors must state the cost of their credit in terms of an Annual Percentage Rate (APR). This rate takes into account how the loan is repaid on a yearly basis, and allows you to accurately compare the cost of credit among lenders. For example: You borrow $1000 for one year and pay a finance charge of $100. If you can keep the entire $1000 for the whole year and then repay $1100 at yearís end, you are paying an APR of 10 percent. But if you repay the $1000 and finance charge (a total of $1100) in twelve equal monthly installments, you donít really get to use $1000 for the whole year. In fact, you get to use less and less of that $1000 each month. In this case, the $100 finance charge amounts to an APR of 18 percent.

-- Credit Tip by FindLocalBanks.com
The finance charge is the total dollar amount you pay to use credit. It includes interest costs and other costs, such as service charges and some credit-related insurance premiums. For example: Suppose you borrow $1000 for one year, and the interest is $100. If there is a service charge of $10, the finance charge will be $110.

FIXED RATE MORTGAGE LOANS:
   These type of mortgage loans charge a fixed rate of interest for a specified period of years
(i.e. 30 years, 20 years, 15 years, 10 years).
Benefits: Since the interest rate never changes during the mortgage loan, the borrower will always know what his/her monthly payment will be for budgeting purposes.
TWO-STEP/RESET MORTGAGE LOANS:
   These type of mortgage loans charge a fixed rate of interest for a specified number of years (typically 5 or 7 years). Once this initial term has been reached, the interest rate adjusts based on current market interest rates. This newly adjusted rate will be the interest rate that the borrower would pay for the remainder of the mortgage loan.
Benefits: These mortgage loans charge a slightly lower interest rate than 30 year fixed rate mortgage loans, so the borrower' monthly mortgage loan paymnent will be slightly lower. The borrower will also have payment stability for at least 5 or 7 years, depending on the program chosen.
ADJUSTABLE/VARIABLE RATE MORTGAGE LOANS:
   These type of mortgage loans charge an interest rate for a predetermined period of time that is chosen by the borrower (i.e. 6 months, 1 year, 3 years, 5 years, 7 years, 10 years). Once this initial ('introductory') term has been reached, the interest rate on the mortgage loan will be based on a predetermined index. The rate will be subject to periodic rate adjustments for the remainder of the loan. The frequency of rate adjustments will depend on the type of program the borrower chooses.
Benefits: The introductory rate on these mortgage loans are lower than the rates charged on the 30 year fixed rate mortgage loan. The shorter the introductory term, the lower the introductory rate. These lower rates mean a lower mortgage loan payment for the borrower, which can allow the borrower to afford more home.


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