Mortgage 101: Things a First Time Homebuyer Should Know
A home is likely the most expensive purchase you will ever make. In recent years, the push to become a homeowner has been stronger than ever, with low mortgage interest rates and zero-money-down programs available nearly everywhere. Unfortunately, many people who purchased are now facing losing their homes because they did not fully understand the terms of their mortgage upfront. Truth is, these are similarly important with news about Payday Loans, since it keeps them away from any financial hassles and legal disputes. Here are some things that every consumer should know before buying a first home.
Mortgage is the term used to refer to the loan you acquire to purchase your home. There are various different types of mortgages available, particularly in recent years. The ideal mortgage is a traditional, fixed-rate loan. This is available for most people who are able to pay at least twenty percent of the price of the home upfront. The loan is paid back over a period of fifteen or thirty years, and has a fixed interest rate that does not change over the life of the loan.
Another type of mortgage is often referred to as an 80/20 loan. This type of mortgage is available to those who do not have the ideal twenty percent down payment to pay upfront. It is essentially two separate mortgages. The first mortgage will be for eighty percent of the value of the home, and the second will cover the remaining amount. If the home appraises for more than the price you paid for it, the second mortgage will be less. Example: You purchase a home for $200,000. It appraises for exactly $200,000. Your first mortgage will be for eighty percent of the amount, $160,000, and your second mortgage will be for the remaining twenty percent, $40,000. If, however, the home appraised for more than the purchase price, say, $220,000, your first mortgage loan will be for $176,000 (80% of the home’s value) while the second is only $24,000 (the remainder of your purchase price).
You still owe the same total amount, but the biggest advantage is that the interest rate on the first loan is almost always less than that of the second loan. You definitely want the bulk of your loan on the lower interest rate! If you choose to use this type of loan, make sure that you are getting fixed rates on both. Often, lenders will give you a fixed rate on the first loan, but may try to talk you into an adjustable rate on the second. Adjustable rates look great at first, since they often start out very low. They can quickly inflate, however, causing your payment to increase by hundreds of dollars.
Beware of balloon loans. This type of loan usually starts out at a low and often fixed, rate. The payments are treated in the beginning as if it were a much longer loan period. The balloon part comes in at the end of a certain period of time when the entire rest of the loan balance becomes due. You may have been making payments for ten years as though you had a traditional thirty-year loan, when all of a sudden the loan balance is due in full and you owe tens of thousands of dollars all at once.
Interest-only loans are loans where the borrower’s pays only the amount of interest that has accumulated on the loan, without paying any of the principal amount. If the borrower does not voluntarily add to his payment, the amount that he owes will never go down so long as he continues to pay only interest. These loans can be very tricky. Often, they have a low interest rate initially, only to have it increase after the first year or six months. Your payment may increase by hundreds of dollars. The loan may also be interest-only for a certain period of time, then increase to interest plus principal. Add an increase in your interest rate to this, and your payment may almost double!
Hybrid loans are fixed at a low interest rate for a certain number of years, usually one, three, five, or seven, then at an increased rate thereafter. This type of loan is often used by a borrower who does not plan to own the home for a long time.
P amp; I is the term you will hear used to refer to the principal and interest you will pay on your mortgage. Don’t be fooled into thinking that this will be the total cost of your monthly payment! P amp; I does not include taxes or private mortgage insurance (PMI). Borrowers who did not pay at least twenty percent upfront will usually have to pay PMI. It can be expensive, and is difficult, but not impossible, to avoid. Often, 80/20 loans can help you avoid PMI, or it may be cheaper to purchase the PMI upfront and roll the cost into the amount of your loan. Ideally, you should save the twenty percent down payment before purchasing and avoid many problems!
Escrow is the term used to describe the amount of money collected each month by your mortgage company that they use to pay your annual property taxes. Depending on where you live, this amount can vary greatly. Mortgage companies under-estimate the amount you will owe, possibly leaving you owing extra money when the time comes for your property taxes to be paid. Conversely, they can also over-estimate. If this is the case, you should receive a refund for the amount you overpaid and/or your monthly payments will be adjusted accordingly.
Borrowers with high credit ratings (also called FICO scores) will qualify for lower interest rates than those with low ratings. It is a good idea to check your credit report at least once per year to ensure there are no inaccuracies. Knowing your FICO score before you begin shopping for a mortgage can be a good bargaining tool to use in getting a low interest rate. Once you begin seriously looking at mortgage loans, try to keep all of your mortgage shopping confined within a two week period so that the extra credit inquiries will not affect your FICO score. Reading books by financial experts such as Suze Orman or Dave Ramsey can help to educate you further. Be as informed as possible, and you will be well on your way to successful home ownership.
