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A mortgage is a loan. It's made up of the principle (the amount of the loan) plus the interest (money paid to the lender for the privilege of borrowing their money). Here's a shocking mortgage reality: You often end up paying more interest than principle! That's right, the loan can cost more than the house.
Go play around with the numbers (and numb yourself to the shocking cost of borrowing money) on our mortgage calculator.
A mortgage broker is the liaison between you and the lending institution (known officially as the "lender") that will be offering you a mortgage. You can bypass this person and deal directly with the lender.
The title is proof you own the property. As long as you owe on your mortgage the lender has a lien against your title, meaning if you don't make payments, the lender can unplug the jukebox and sell your home right out from under you to re-claim their losses.
Amortization is the repayment of a loan through monthly payments.
TYPES OF MORTGAGES
There are two categories of mortgages: conventional and governmental.
Governmental loans are mortgage programs sponsored by a government agency. These include the Federal Housing Administration (FHA), the Veteran's Administration (VA) for veterans, and the Rural Housing Service (RHS) or Farmers Home Administration (FmHA) for those living in rural areas. These loans work best for homebuyers with low or moderate incomes, because they require low down payments and have less stringent qualifying guidelines. None of these agencies actually loan you the money; they only guarantee loans granted by lenders who participate in the program.
Conventional loans are loans that are not guaranteed by the government.
There are various types of mortgages:
A Fixed Rate Mortgage (FRM) is a mortgage with an unchanging interest rate. This is a lovely option for people who think they'll own their homes for a long period of time, or those don't like change and who prefer an unvarying monthly payment. Lenders charge higher interest rates for these loans because the money is loaned for a longer time and is more of a risk to the lender.
The opposite of a fixed rate mortgage is the Adjustable Rate Mortgage (ARM). An ARM has an adjustable interest interest rate that changes over the life of the loan. The benefit -- ARMs usually offer a "teaser" interest rate that is exceptionally low for the first year or so of the loan, and even after that ARM rates are typically lower than those on fixed mortgages. Why? Because ARMs are "capped," often at around 2 percent per year and 6 percent over the course of the loan. Still, ARMs can be risky -- especially when you look at how high interest rates can go (topping 18% in the 1980s). If you get a 30-year fixed rate mortgage at, say, 5 percent interest, it stays at 5 percent for 30 years. If you get a 15-year ARM at 4 percent and interest rates jump to 12 percent a few years later, you'll be paying 3 percent more in interest, even with a cap of, say, 4 percent.
Jumbo loans are loans that exceed conforming loan amounts specified by Fannie Mae and Freddie Mac. Currently, jumbo loans on single-family homes exceed $417,000 ($625,500 in Alaskaand Hawaii). Interest rates are generally higher on jumbo loans due to the larger risk of default involved.
Some lenders offer alternative financing for buyers with weak credit histories, previous bankruptcy, or unique financial situations. For instance, No Documentation Loans, are designed for homebuyers who are self-employed, work off commission, or have sources of income that are difficult to document.
YOUR FINANCIAL STRATEGY
You're looking for money to buy a house. But before you approach any lenders, figure out your financial strategy. Ask yourself these questions:
- How long do I plan to live in this house?
- Where do I see myself in five or 10 years?
- Do I have to or want to make home improvements?
- Do I want to keep cash on hand for other investments?
- Can I take financial risks?
- Do I want to be debt-free?
If you can afford to take financial risks and have the assets and credit score to back it up, you can get the best deals. Consider mortgages with adjustable rates, longer pay-off terms (30 years or more) and interest-only payments. You can also find lenders who don't require a down payment or who will loan you more than the home's sale price up to its appraised value. These products let you pay the least amount of cash. The thinking is: Live as well as you can while still being able to comfortably pay the bills. Don't worry about the overall debt, especially since much of it is deductible on federal income taxes.
If you're the type who shirks from debt and risk, find loans with shorter terms (15 years or less) that allow you to make big down payments and mail extra payments whenever possible. The thinking is: Live conservatively so you'll be able to handle whatever problems arise down the line.
- Use mortgage calculators and other tools that let you see exactly how much you'll have to pay under various scenarios.
- Shop for the best rates from both local banks and national lenders. Consider working with a mortgage broker.
- Decide if you are willing to pay for points to get a lower interest rate, or take a higher rate to keep closing costs down.
- Combine different loan features to create a loan that is comfortable for you and offers the flexibility to accomplish your goals.
- Don't forget about other costs like property taxes, insurance and homeowners' association fees.
- Ask about alternative loan terms, such as 20 years. They exist though many lenders don't advertise them.
- Consider refinancing your current home if you need cash for a second home.
(Information from Scripps Howard News Service was used in this article.)
