As most people know, owning your home is a major part of the American dream. The purpose of this article is to help you understand the various steps that you need to follow to accomplish your dream. Remember, owning a home is a big responsibility and we want to make sure that you're ready to take this responsibility in order to enjoy possibly your biggest investment ever. Buying a home take planning and carefully evaluating the right mortgage to make your dream a reality. Home mortgage market is flooded by thousands of creditors and finding the right lender and mortgage loan is a big challenge. However, if you follow the steps and pay close attention to details, it could be a fun experience.
Before we get started, let's ask some of the simple questions that come to mind. How big a loan can I get? How will lender decide if I qualify for that loan? What mortgage is best to meet my budget and needs? How will my mortgage payment change in the future? Remember, our goal is to help you become an educated consumer and by the time you finish reading our mortgage articles, you'll have answers to these questions and several more.
Are You Ready to Buy a Home?
This question may sound like an easy one but this will prepare you for some of the questions a lender will ask when you actually apply for a mortgage loan. It is also important to understand your financial limits and boundaries so that you can get an idea about how expensive a home you can afford before you go shopping. The whole idea of asking this question is to avoid costly mortgage mistakes and avoid mortgage surprises or disappointments. First of all, believe it or not being prepared mentally is a big help. Sometime people talk about buying a home for years and nothing really happens. Does that mean that they couldn't find their dream home? May be. But more than likely it happened because they were never ready mentally to commit to it and that why it never happened. That's why it is important that you prepare yourself mentally for the responsibility of owning a home. Remember, if you are ready to buy a home, it doesn't necessarily mean that you're are prepared to shop for a mortgage. Shopping for a mortgage has some additional requirements such as maintaining or building a good credit history by paying your bills on time, holding a steady job and showing that you have managed your existing debt responsibly. If you feel that you don't have a chance of getting a mortgage don't lose hope. Continue to manage your fiscal matters responsibly and you may qualify in near future. Remember first step is to get a better idea whether you have the mind set and is it the right time to buy a home, or whether you need to work on improving your credit history, paying off existing debts , or just saving more money for down payment.
It is important to understand that when you take out a loan, you sign documents that you promise to pay back the loan. You interest rate will depend on the good likelihood that you can keep your promise. Your ability to pay back the loan is probably is going to be the biggest factor in deciding whether you get the loan or not. You also need to understand that mortgage loan is a secured loan. That means that it is secured by a fixed asset, your home. If you can't make monthly payments, lender has the legal right to foreclose on your home and recover whatever they can. No lender wants to deal with high percentage of foreclosed loans so they use some general but very specific guidelines that help them making a decision on a mortgage loan. However, these guidelines are flexible and can change if lender is willing to put more trust in you and take more risk in turn. Also, these guideline can easily change from one lender to another if they operate in different market segment such as prime and sub-prime.
Fixed-rate mortgage loans - Most people expect to live in their homes for many years. If you're one of them, interest rat of your mortgage loan may be your primary consideration. Remember, if you are going to pay your loan back in 30 years, it makes lot of sense to get some sort of guaranteed interest rate for the life of the mortgage loan. It provides you with a fixed monthly payment for the entire period and a peace of mind. Mortgage loans offering this feature are known as fixed rate mortgage loan since their interest rate is fixed for the entire period. If you decide that you like a stable, predictable payment of a fixed-rate loan, then you can choose from a variety of repayment terms such as 15, 20, 30 or even 40 years. Here are some points to compare about various fixed-rate loans.
30-year fixed mortgage loan - This is probably the most common type of fixed rate mortgage loan product on the market. It is long enough to give your the ease of lower monthly mortgage payments and allowing you to use extra cash for other purpose. Sometime fixed-rate loans require certain minimum down payment before they are approved. There are also closing costs that you should be aware of.
15-year fixed mortgage loan - As the name suggests, this loan has a fixed interest rate for the life of the loan but the life span is lot shorter- 15-year in this case. A 15-year mortgage loan offers a lower interest rate than a 30-year or 20-year mortgage and will save you a significant amount of interest over the life of the loan. You'll build up equity in your home quickly, which can allow you to move to a more expensive home sooner. If you're close to your retirement, this shorter term mortgage allows you to own your home sooner. However, these benefits of a 15-year loan come at a price - your monthly mortgage payment will be considerably higher than a 30-year mortgage loan
Variable or Adjustable-rate mortgage(ARMs) loans - These mortgage loans offer a fixed interest rate for initial 3-10 years and then mortgage interest rate adjust annually. these loans are great for people whose income is expected to grow substantially and steadily over the years. Also, if you only plan to stay in your home from 3 to 5 years, adjustable rate mortgage loan can offer some advantages. One of the main feature of these loans is that interest rate moves up and down as market conditions change. Although ARM usually offers a lower initial interest rate, your mortgage payment change periodically( usually once or twice a year). Interest rate changes typically are subjected to two caps, one for each adjustment period and one for the life of your loan. For example, a typical ARM that adjust annually may have a per adjustment cap of 2% and a lifetime cap of 6%.
Since these loans offer lower initial interest rate, most people can qualify for a larger home mortgage loan and can buy lot more than they could actually afford. If interest rates go down, your payment will come down but if they go up, you may end up paying lot more than a fixed-rate loan. Interest rate changes on a adjustable-rate mortgage are always tied to a financial index which is a readily publishable rate - for example, the financial index for many credit cards in the prime rate. Three most popular type of adjustable-rate mortgage are:
Treasury-Indexed ARMs - These rates are indexed to six-month, one year, or three-year treasury bills or securities. Depending upon which of these three indexes you choose, your interest rate will adjust once every six months, once every year, or once every three years.
CD-indexed ARMs - Indexed to the certificate of deposit(CD) index. Rate adjustment typically occurs every six months, with a per adjustment cap of 1% and a lifetime cap of 6%. Interest rate on Certificate of Deposit(CD) are published in financial publications and are available to public.
Fund-indexed ARMS - These mortgage rates are indexed to the actual cost a particular group of lending institution pays to borrow money. Lenders using this index can adjust mortgage rates monthly, every six months or annually. The most popular index of this type is the Cost of Funds Index for the 11th Federal Home Loan Bank District of San Francisco. When you compare ARMs that have different indexes, you should look at how the index has performed in the past. Some indexes are widely published in newspapers, making them easy to track. All mortgage lenders are required by law to provide you this information on how to track the index and to provide a 15-year history of the index they use. However, tricky part is that past performance can not predict future performance of the index and the direction your interest rate may go.
In addition to these, there are special type of adjustable-rate mortgages that doesn't adjust your interest rate until several years after you take out the loan. These loans offer you an initial lower interest rate and several years if fixed payment before there is an interest rate change. You can get a three-, five-, seven- or even a ten-year fixed period ARM. This type of adjustable-rate mortgage protects you against rapid interest rate increases in the early years of your loan.
Understanding Mortgage Loans
30-year fixed mortgage loan - This is probably the most common type of fixed rate mortgage loan product on the market. It is long enough to give your the ease of lower monthly mortgage payments and allowing you to use extra cash for other purpose. Sometime fixed-rate loans require certain minimum down payment before they are approved. There are also closing costs that you should be aware of.