If you're going to be responsible for paying
a mortgage for the next 30
years, you should know exactly what a mortgage
is. A mortgage has
three basic parts: a down payment,
monthly payments and fees. We've already discussed
the down payment.
The monthly payment is the
amount needed to pay off the mortgage over the
length of the loan
and includes a payment on the
principal of the loan as well as interest. The
fees are all the
costs you have to pay up front
to get the loan.
Keeping in mind those basic
concepts, we'll look at some
of the mortgage variations that are available:
Fixed Rate
A fixed rate mortgage requires
a monthly payment that is
the same amount throughout the term of the
loan. When you sign the loan
papers you agree on an interest
rate and that rate never changes. This is the
best type of
loan if interest rates are
low when you get a mortgage.
Adjustable Rate
Be careful if you're considering
taking an adjustable rate mortgage.
An adjustable rate mortgage
allows the interest rate on your
loan to vary with prevailing
interest rates. If rates
go up, so will your mortgage rate and
monthly payment. If rates increase
a lot, you could be in big
trouble. If rates go down, your
mortgage rate will drop and
so will your monthly payment.
A good strategy may be to stick with
a fixed rate loan to safeguard
against raising interest
rates. And if rates drop, refinance
your mortgage to take advantage
of lower rates.
Pledged Asset
Mortgages
In a pledged asset mortgage,
you can use assets such as
stocks, bonds, other property,
etc. as collateral on your
loan. This eliminates the need for a down
payment and also avoids PMI
(Private Mortgage Insurance).
Mortgage Help Programs
There are programs that will
assist you in obtaining and
financing a mortgage. The number
and variety of these programs
makes it impossible to list
and discuss them all here. Check with your
bank, city development office
or a knowledgeable real estate
agent.
Veterans Administration
(VA) Loans
The Veterans Administration
offers loan benefits to veterans
who served in the armed forces
on active duty during times
of conflict, such as Korea,
Vietnam, Desert Storm and Afghanistan,
as long as they were not discharged
dishonorably. The first step
to obtain a VA loan is to obtain
a certificate of eligibility,
then submit it with your most
recent discharge or separation
papers to a VA eligibility center.
- VA loans
offer some very helpful
benefits including:
- 100% financing
- That means no down
payment
- An origination fee of no more than 1% of
the loan
- Low interest rates
- A loan guarantee from the
VA
Federal Housing Administration
(FHA) Loans
The FHA was created to aid
people in obtaining affordable
housing. FHA loans are actually
made by a lending institution,
such as a bank, but the federal
government insures the loan.
This is often the least expensive
loan that non-veterans can
get.
To qualify for an FHA
loan, you must be a permanent
resident of the United States
(although not necessarily a
citizen), you must live in the home you
purchase with the loan and
the dollar amount of the
loan must fall below a maximum set
by the government. This amount
is raised for those purchasing
a home in designated "high
cost" areas of the country. You also have
to be "credit worthy," meaning you
need to have your credit
report in order. You know how to do
that, right?
- The benefits of an FHA loan include:
- A choice
of many different loan
programs
- Low down payment (as low as 5%)
- Low closing
costs
- A higher qualifying debt
ratio than other
loans, meaning you can have more debt or
less
income
Borrowing against your
401(k) plan
If you contribute to a 401(k)
plan at work, you might be
able to borrow money from your
plan to buy your house. You
can borrow up to half of the
money you have accumulated
(up to $50,000). Even though
it is your money you will have
to pay it back as you would
any other loan or you will
be penalized. Usually it's
paid back through monthly
deductions from your paycheck.
This strategy does have its drawbacks, however.
Borrowing
may slow the growth of your
401(k) investment. Also, you
may decide to decrease the
amount of your monthly 401(k)
contributions to compensate
for the repayment deductions.
This will keep the amount of
your check the same but will
also hinder the growth of your
retirement savings.
If you
leave your job, any outstanding
401(k) loan balance will be considered a
withdrawal and you will be assessed
a 10% penalty if you are under
59 1⁄2 and you will also
be taxed on that money.
Fannie
Mae and Freddie Mac
Fannie Mae and Freddie Mac
are two federal agencies that
can assist you in finding approved
lenders. They do not, however,
make loans themselves.
Foreclosure
Homes
A foreclosed home is one that
has been "repossessed" by the lender.
These homes are then resold
quickly and sometimes for
much less than market value. If you can find
one of these homes, chances
are you can get a great deal.
For Sale By Owner
(FSBO)
You may be in luck if a house
you are interested in is being
sold by the owner, without
the assistance of a real estate
agent. Since the seller does
not have to pay a standard
agent fee, as much as 8% of
the selling price, the seller
can actually sell the house
for less and make more.
It
is harder to find a FSBO home since
they aren't listed
with real estate agencies.
But you can find them in
the newspaper or simply by driving
down the street looking for
a "For Sale" sign. You may want
to hire an attorney to help
you through the paperwork
aspect of the sale, since no real estate agent
is involved to guide you.
