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DECISION OF BUYING A HOME
The first step in purchasing any home is to be sure that you actually want to buy a home. If you are just pondering on the idea of buying a home and are not set on the idea, then it is probably not the time. Also, question your budget for at least the next two years to make sure that you can sustain the mortgage payments. Are there going to be increases in your expenses, such as a birth of a child within couple of years? Are there going to be any changes in your income in the next two years? Furthermore, investigate how much can you afford for a mortgage payment. Look into your credit score and how much you would need for a down payment on the mortgage. Both factors affect the cost of the mortgage. Do you feel that you have saved up enough of a down payment to give you a favorable mortgage? One way to calculate your mortgage payments is to get pre-qualified for a mortgage. Then, look at whether that amount is something you can afford for the home that you truly love.
Although there are some hurdles to buying a home, there are also benefits. Your monthly mortgage payments are either fixed or fluctuate with the interest rate; unlike rent which increases on an annual basis. There are also tax benefits with buying a home that you don't notice when renting. Another positive side to buying is that the mortgage payments will also stop upon full payment of the mortgage. This is a good strategy for retirement. In addition, homeowners also get to keep the increased value of their property, a feature that is not available when renting.
In conclusion, all the benefits of buying a house have to be weighed against all of the hurdles described.
Mortgages: The Basics
(1). Mortgage. A mortgage is a special type of loan. A mortgage is secured by a piece of real property. The lender has a security interest in the property, and in the event that the mortgage loan is not paid, the lender would have the right to foreclose and take possession of the property.
(2). 30-year Fixed Rate Mortgage: This type of mortgage is the most common. The interest rate is fixed; it will not change over the course of the mortgage. The payments are also fixed; they will not change. The term, or length of time, of a fixed rate mortgage may vary as well. Some loans are as short as 10 or 15 years; others are as long as 40 years, but 30 years is the most common.
(3). Adjustable Rate Mortgage (ARM): This type of mortgage is less common. The interest rate is not fixed; it will vary from year to year. The interest rate is based on some sort of index, such as the U.S. Treasury rate or the LIBOR index. For example, the interest rate could be LIBOR +5%. If the LIBOR rate was 4%, then the interest rate on the mortgage would be 9%. In an ARM, the interest rate will generally adjust once per year, at a set time. For example, if the interest rate was set in January, each year in January the interest rate would change to reflect the ARM value. Some ARMs adjust more than once per year, and some only adjust every 3 or 5 years. Generally, the interest rate can only rise or fall a maximum of 2% each year and not more than 6% total. That means that if your initial rate is 7% (LIBOR of 2% + 5%), the maximum interest rate possible is 13%, and the absolute minimum is 5%. The 5% minimum would be if the LIBOR rate was 0%, then 0% + 5% would result in 5% interest.
(4). Interest Only Mortgages: In an interest-only mortgage, for the first several years the payments consist of only interest; nothing is paid toward the principal. However, after that initial period, the payments will go up considerably.
(5). Home Equity Loans: A home equity loan is also called a "second mortgage." For example, let's say that your home is worth $150,000, and you owe $100,000 on it. The difference is called equity. In that case, you would have $50,000 in positive value in your home. A home equity loan would be a loan secured by that equity.
(6). Balloon Payment Mortgages: In a balloon mortgage, the payments are not monthly or fixed, but rather are expressed as $X over Y time. For example, it might be $12,000 over a year. You could make one payment at $12,000, or 24 payments at $500, or any combination.
Different Mortgages
Choosing a mortgage can be as difficult as choosing a house. The mortgage broker may offer different deals with different terms and even different types of mortgages. However, be aware, that neither the mortgage broker nor the bank bears the risk of foreclosure. Banks don't hold on to your mortgage after you sign up for it; instead, they resell it to another company. Banks are in the business of making the loans. Often, a bank will resell a loan to another bank or company. You must figure out which mortgage is best for you, in terms of cost and risk associated with the payments.
To select an optimal mortgage it is necessary to understand all the options. The fixed-rate mortgage is the easiest one to comprehend. Here, the interest rate stays the same for the full life of the mortgage; meaning the payments will be constant for the next thirty years, or whatever the length of the mortgage. This reduces the risk that other mortgages carry as the payments are consistent over time.
The second type of mortgage is the adjustable-rate mortgage (ARM). The interest rate fluctuates with mortgages. There are usually terms that dictate the maximum amount that the interest can grow in one year and the maximum amount that the interest rate can reach. At the beginning of the mortgage, the interest rates on an ARM is lower than on a fixed-rate mortgage. However, typically, every year the interest rates adjust. Payments will grow larger as time progresses. When evaluating this type of mortgage, consider the worse case scenario, and make sure that you can afford the maximum rate possible.
Another type of mortgage is the 5/25. This mortgage has characteristics of both the fixed and the ARM mortgage, and the initial interest rate is usually between the two types of mortgages. For the first five years, the interest rate is fixed; however, after five years, the interest adjusts to the current fixed rate. This option has the benefit of providing a lower fixed interest rate for the first five years, however, there is great risk with the 5/25 mortgage that after the five years the mortgage payments would rise to unaffordable levels. This mortgage should only be considered if you are planning on selling or refinancing within five years. There is also the 7/23 mortgage which is similar to 5/25; the only difference is that the fixed interest rates last for seven years instead of five.
Another type of mortgage is the COFI ARM. Basically it is the same thing as an ARM, but the interest rate is based on the Federal Home Loan Bank's 11th District. These interests tend to fluctuate less than regular interest rates. However, the rates are adjusted on a monthly basis, and the mortgagee gets the invoices every month quoting three different payments which reflect the new interest rates. The first option is to pay the payment that is based on the Federal Home Loan Bank's 11th District, which would allow the mortgagee to pay of the home in 30 years if this payment is chosen. The second type of payment that is quoted is the interest only; this type of payment does not take care of the principal on the loan. The third payment option is the minimum payment based on the initial interest rate contracted. This third option might have a payment lower than the interest rate, having the affect of increasing your principal balance. This is a usable option, especially for people concerned about the fluctuating monthly rates.
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