Mortgages 101

By Martin Lukac

Finding the perfect mortgage is like finding your dream home; it takes lots of work. You may find that you have a few questions about mortgages. Buying a home can be a very stressful time, but through a little education, you can understand every step of the process in securing your financing.

Don’t think that banks are the only places to get a mortgage. You can find comparable mortgages through many different financial service companies, including credit unions, brokerage firms and even insurance companies. There seems to be more and more mortgage companies popping up everywhere. You can find lenders, interest rates and mortgage information easily on the internet. Then start contacting the lenders and ask questions. Ask your friends who they have had good experiences with. If you are looking for a traditional mortgage, you will find that there are many places that want your business. Properties that are less traditions, say they include agricultural land, will most likely fit into a bank’s mortgage program better than other lenders.

There are two types of mortgages most commonly available: fixed-rate and adjustable rate mortgages (ARM). Fixed-rate mortgages have an interest rate that remains the same for the entire life of the mortgage. This means that no matter what, your monthly payment will remain the same every month. Fixed-rate mortgages usually have a higher interest rate than ARMs.

An adjustable rate mortgage has an interest rate that changes on a regular basis based on set limits. There are caps to an ARM that limits how much the interest rate can change each year and over the life of the loan. ARMs offer lower initial interest rates, so that you can afford more house for the same payment. But beware; the interest rate may go up, and so will your monthly payment.

There are some loans that combine both fixed-rate mortgages and ARMs. The loan may be fixed in interest at first, for say five years, and then become an ARM.

The right mortgage for you depends on many factors. How long do you plan to own the property? Are you comfortable with changing interest rates? How financially dependent are you on a payment that does not increase?

You may have a lender ask you if you want to pay points. What are points? They are up-front interest charges that allow you to lower your interest rate during the life of your loan. Basically you are prepaying interest. By doing so, your monthly mortgage payment will be less. Each point equals 1% of the total loan amount. This may be a good idea if you plan to remain in the home for many years. Many times, points can be deducted on your taxes.

You’re monthly mortgage payment will primarily be maid up of your principal and interest. Some lenders may also place your real estate taxes and homeowner’s insurance into escrow, so your monthly payment will include money for them as well. If you place less than 20% down, you will be required to pay private mortgage insurance. This is to protect the lender against non-payment.

Now that you know a little more about mortgages, the next step is to go in and complete an application. You will be asked for information about your income, employment, assets and liabilities. Your credit report will be checked. Once approved, your well on the way to owning your home. Various things will have to be completed prior to closing which include appraisals, title searches and inspections. During this time, interest rates can change, so see if you lender will allow you to lock in your rate for a certain period of time. Once everything is completed, you will close on your new home.

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