Mortgages

Perhaps there’s no better way to see if you’ve finally reached a stage of a grownup or not when you ask yourself that very important question: “Do I want to rent or should I buy?”

There’s a point in everyone’s life when packing seventy cardboard boxes and then unpacking them the next day after hours of lifting, carrying and tripping over things, just because the ex-roommate decided to adopt seventeen cats and plays his ukulele too loud, doesn’t seem like fun anymore. There’s the time when inviting parents over for a Christmas dinner is not a good idea because Joe from upstairs got himself a new girlfriend and is training for next sexual Olympics, and the walls are really thin and the girlfriend is, let’s just say really… expressive.

Or perhaps you just met that special someone who doesn’t seem like he or she would run away to become an Indian yogi or to join the Spanish circus at the first evidence of a crisis in a relationship and settling down doesn’t sound like something only a dork would do. Whatever it is, this is a decision which many people face, and this decision is not as easy to make as it may sound.

As a potential homeowner, you can expect the equity in your home to go up over time as your mortgage is paid down. That, combined with regular appreciation in real estate values, can be a rapid and good way to increase your net worth. In contrast, the person renting over the same amount of time is left with absolutely no property investment though may have enjoyed lower living expenses – and roommates with seventeen cats and a ukulele – as well as the opportunity to invest in other opportunities.

When comparing owning to renting, you may want to add up all of the figures, including the cost of your potential house, the amount of your down payment, extra costs such as house inspection, land survey if necessary, title insurance search… utilities, immediate repairs, interest rates and insurance, and then compare them with how much you are currently spending on rent (and beer if your roommate with seventeen cats and the sound of ukulele is making you drink).

You have to appreciate a value on the enjoyment and satisfaction that you will derive from owning your own home, the peace and the privacy that you will most likely never achieve while renting. Even if you live in the nicest area in town with fantastic neighbors, a saint of a landlord you’re still not 100% set. What if your landlord has to sell the house? What if you want a dog and your fantastic landlord won’t agree to let you keep in the house?

So you start your house-search. You ask around, you do some research, you get yourself a Real Estate agent. You drive to see the houses every weekend, looking, comparing, contrasting. Your agent knows that you can spend between $90,000 to up to $180,000 so the houses you look at are representatives of a whole span of architecture – Victorian, modern; gingerbread houses and suburbian houses identical as if cut out with a cookie cutter. One day you find “the house”. It’s perfect, it passes all the inspection tests, there are no termites, nothing’s wrong. You want to buy the house! Your agent tells you that before you make the offer you need to apply for a mortgage, in order for your offer to be considered.

A mortgage is a long-term loan that you – borrower – have to obtain from a bank, thrift, independent mortgage broker, online lender or perhaps even the property seller.

Your house and the land it is on basically are the collateral for the loan that you take out. You will sign documents at closing time giving the lender a lien against the property that you’ll purchase. If you don’t make payments as agreed in the contract, the lender can take possession of your home through foreclosure.

Since mortgages are such big loans, consumers pay them off over long periods of time -- usually around 15 to 30 years. The monthly payments gradually get smaller and decrease the principal balance, slowly at first then rapidly toward the end of the loan.

So what’s in the mortgage payment? When escrow is used, a monthly mortgage payment is called a PITI payment. This happens because each one covers a portion of the following four costs:

· Principal – this is the loan balance. Interest – this is the interest that is owed on that balance. Real estate Taxes -- taxes assessed by different government agencies to pay for public park construction, fire department service and other public domains in your city / area. Property Insurance -- this is your insurance coverage against theft as well as fire and natural disasters such as floods or tornadoes.

You can choose to pay your real estate taxes and your insurance in lump sums when they are due instead of monthly installments to their escrow accounts.

You can have different kinds of mortgage and depending on the type that you have, your monthly payments may also include a different section for private mortgage insurance or things like government-backed mortgage insurance premium.

The breakdown of each of your mortgage payment such as the principal, interest and any extras differs over a period of time since mortgages are based on special repayment formula that is called amortization. This means that the lender spreads the interest that you won on the mortgage over a number of payments so that your loan is as affordable as it can be.

For example, on a 30-year, $150,000 mortgage with a fixed interest rate of 7.5 percent, a homeowner who keeps the loan for the full term will pay $227,575.83 in interest.

Since the lender cant possibly expect that person to pay all that interest in just a few years the interest has to be spread over the full 30-year term. That keeps the monthly mortgage payment at $1,048.82.

But the only way to keep the payments stable is to have the majority of each months payment go toward interest during the early years of the loan.

Of the first months payment, for instance, only $120 goes toward principal amount. The other $928.82 goes toward interest. That ratio gradually reverses over time, and by the second-to-last payment, when we’re able to teleport ourselves from Venus to the Moon, $1,035.83 of the borrowers payment will apply to principal amount while $12.99 will go toward interest.

If you’re like majority of borrowers, most likely, you will be paying off your mortgage for years, and after all so a small difference in the mortgage rate can make a big difference in your monthly payments. The following could help you make the shopping for mortgage more efficient:

If you plan on applying for a mortgage it is highly recommended that you take some time to get your credit report from all the credit reporting agencies and check the report for any errors. If there are any inaccuracies you don’t know about, this could cost you thousands of dollars in extra interest or even cause a denial of credit. According to professional sources close to 50% of all credit reports contains errors that are significant enough for an individual to not be awarded a loan.

Second of all, tracking interest rate movements is highly recommended when shopping for a mortgage. For example, try to find out what current mortgage rates are and whether they are decreasing or increasing.

Mortgage rates fluctuate as frequently as any other features of a financial market. It is virtually impossible for them to remain constant for any lengthy period of time. There are a number factors affecting rates – such as the political or economical crisis in the country or something even as simple as weather changes -- so it is often impossible to predict interest rates. However an understanding of key economic indicators can provide guidance to the future direction of mortgage interest rates.

Another thing to remember is that mortgage rates go up and down along with yields on Treasury notes and bonds because the government securities reflect the overall direction of interest rates in the country. If you’re watching closely Treasury market as well as mortgage market trends you have a better chance of obtaining interest rate savings.

Finally, before you begin shopping for a good mortgage loan, you should decide which mortgage program is the best for your lifestyle and your financial situation. Since a mortgage is a major purchase, it is essential to know that you have the most appropriate program for you. Current financial market offers you a vast choice of loan products and new opportunities that were never there before, so it pays to be knowledgeable on the different types of loan programs first.

When you choose the right type of mortgage you need to review your financial objectives and ask yourself some questions, such as:

Additionally, your own personal expectation for the future of interest rates as well your movement – or lack of – within the tax bracket and ability to handle risk are also important things to think about when choosing a mortgage loan.

When you decide to choose a certain loan program, and get current interest rates, you can begin shopping interest rates among banks and lenders. To find the best possible deal, you should research the rates and the banks that offer them and compare all the mortgages that offered by several lenders before you decide to apply.

It’s not that easy to compare loans because the mortgage rate is only one part of your entire mortgage loan. You may also want to compare principle payoff rules and any other fees such as mortgage insurance.

As mentioned before there are many, many different fees that might be involved in getting a mortgage. These can add thousands of dollars to the cost of your loan; you also need to know that some lenders have different names for them. One lender might offer to waive one fee but then add another one. Make sure you ask questions and if you’re not sure about the explanations ask again or ask them elsewhere.

You need to pay very close attention to the terms of your mortgage loan, for example notice what type of the mortgage you’re getting, if there’s a presence of prepayment penalties, how low or high can down payment get, what is the the mortgage insurance requirement, what’s the payment schedule like, the lock-in period, etc.

Remember to choose the loan with the rate and other terms that suit your particular situation best. For example if you’re planning to sell your house or refinance in the next 3-5 years or if you’re expecting to prepay your loan the prepayment penalty “detail” should be very important to you.

When you have decided to go with a certain institution and a mortgage lender, ask him or her to be specific about all the documents that you’re required to provide for the mortgage approval process. Find out also if the loan application and the lock-in fees are refundable in case your application is not accepted.

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