Mortgages




Unless you have cash in hand, buying a house will require a mortgage. A mortgage is simply a loan used to purchase real estate. There are different kinds of mortgages, and a mortgage broker can help you determine which type of mortgage is right for you.

With all mortgages, there are many factors to consider. The interest rate is the factor most people look at first, and it's an important one. That interest will be paid for 15 or 30 years, so it can definitely add up quickly. But keep in mind that there will be additional fees due at closing, including closing costs, attorney's fees, and other fees that may be imposed by your mortgage lender. Read all paperwork carefully and make sure you understand what you're signing before you make any decisions.

It's also important to remember that before deciding to purchase your own home, consider all the expenses that will appear: property taxes, insurance, utilities and maintenance. Sit down with a piece of paper to determine how much you can really afford. Even if you can get approved for more, don't stretch yourself too thin. A mortgage calculator, such as Bankrate's calculator, can help you figure out your monthly mortgage payment. There is a lot of responsibility in owning your own property, and understanding this before taking out a mortgage can help you stay away from foreclosure.


Credit


Good credit is necessary to get a mortgage. The better your credit, the lower your interest rate. Banks take a good hard look at your credit history, your debt to income ratio, and more to determine if you're a good risk. If you have bad credit, or none at all, you should try to get in better standing before attempting to apply for a mortgage.

How do you do this? Check out the "Credit" article under "Basic Info" for more information.


What else do I need?


In preparation for applying for a mortgage, you'll need to get together a picture of your finances. Be prepared to present pay stubs, W2s or tax returns, bank statements and proof of assets. The bank preparing your mortgage application will run your credit, and they'll want to know how much of a down payment you can put down, and where this money is coming from.

Once you've selected the home you want to buy, it's also recommended that you have a home inspection to make you aware of any potential structural problems. And once your offer has been accepted, and the paperwork is being processed, your mortgage lender will be having an appraisal done on the property to make sure it's really worth what you're asking to borrow.


Types of Interest and Payments


Interest rates are at historic lows, and as a result most mortgages being written today are fixed rate. This means that the interest rate will stay the same for the life of the loan. But there are other types of loans available, as well, and depending on when you plan on purchasing, and what the economy is like at that time, a different option may be better for you.

Variable rate, or adjustable rate, interest is the other common option. This means that the interest rate can fluctuate with the going rate. In times of high interest rates, this can be a good choice, since it opens up the possibility of getting a lower rate in the future. In times of low interest rates, however, this is not a very popular option. Some banks will offer a low introductory rate, with that rate going up after a set period of time.

Other types of loans are available, especially for those who expect their income to increase substantially as time progresses. These include interest-only payments and balloon payments.

With interest-only payments, the monthly payments for a fixed amount of time will consist of only the required interest payment. The money paid each month will not go toward the principal of the loan, meaning no equity is being built in the property. The only thing going down is the interest. After the fixed amount of time, payments will go up (possibly substantially), but money will also start going toward the principal.

With balloon payment mortgages, the monthly payments are lower, but when the mortgage loan reaches maturity (after the 15 or 30 year term), the balance will not have been paid. This means that a final, much larger, payment is due at the end.


For more information on types of mortgages, visit:


FHA Mortgages


Some banks are approved to offer loans in conjunction with the FHA, the Federal Housing Administration, that can offer first-time homebuyers the opportunity to purchase a home with a lower down payment. A traditional mortgage assumes a 20% down payment, while FHA mortgages allow a much lower percentage, under 5%.

FHA loans are offered to first-time homebuyers to help them reach their goals of owning their own homes. Interest rates can be lower, also, adding to the appeal. FHA loans can also help those whose credit scores are not quite perfect.

Some things to consider: with down payments under 20%, PMI (private mortgage insurance) may be added to your payments. This means that until your equity hits 20% of the home's value, you will be paying an additional amount each month to protect the bank's assets. Also, FHA loans have limits on how much of a loan you can take out, both as a maximum and in relationship to the appraised value of the home.


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Reverse Mortgages


For those who are at least 62 years old and own their homes, without any money owed to a mortgage lender or bank on those homes, reverse mortgages are an option. A reverse mortgage is a loan taken against your home's equity. This loan is paid out as either a lump sum or in installments. As long as at least one of the owners is alive and living in the home, the loan does not need to be repaid. Property taxes and insurance must still be paid, however, and neglecting to pay for either one can still lead to foreclosure. If all owners are deceased, the property is sold, or the owners live elsewhere for at least 12 months, the loan becomes due.

Reverse mortgages will allow you to utilize the money you've built in equity in your home to live as you see fit. Keep in mind, however, that there are interest charges and fees involved that can quickly eat away at the equity you've built. While a reverse mortgage may allow you to stay in the home you own, there may be better options, such as downsizing, that will allow you to keep the equity you've built and still increase your cash flow. Be sure and explore all your options before deciding on a reverse mortgage, or any loan.