Home Finance- Make Your Mortgage Work For You

Home Finance: Make Your Mortgage Work for You

Finding the right mortgage can be a daunting task, so taking the time to review some basics now can save you time down the road.

If you're interested in buying a new home, chances are you'll need a mortgage. Luckily, there are many options available that work for a wide range of financial needs.

How Much Can You Afford?
One of the first things you should do is to determine how much you can realistically afford to spend on your mortgage. A good rule of thumb is that your total monthly mortgage payment should equal no more than 29% of your monthly gross income. Remember, your mortgage payment will include not only the principal (actual amount you borrow), but may also include interest, property taxes and insurance. The next logical step is to get prequalified or preapproved for a home loan. These two words sound a very much alike, but they are really two different things.

• Prequalification means that a mortgage lender reviews your income, assets and liabilities to determine a reasonable loan amount. This can help you narrow your home search to those that are in your price range. Many mortgage lenders will provide this service for free.
• The preapproval process is when a mortgage lender reviews your credit and commits to a specific loan amount. There is usually a nominal fee involved for this, but it gives you the added benefit of being able to make an offer as soon as you find a home you're interested in.

Types of Mortgages
There are three types of mortgages that are popular with home buyers today. Before committing to one, make sure you fully understand all of the terms and conditions associated with it.

• Fixed Rate Mortgage: This is the most common type of mortgage. You'll know exactly what the payments will be during the length of the loan, which is often 30 years, but can sometimes be 25, 20, or 15 years. This is a good choice when interest rates are low and if you expect to live in the house for at least several years. The interest rate will never change, and that means the monthly principal and interest payment will also never change.
• Adjustable Rate Mortgage (ARM): This kind of mortgage is for homeowners who want to start with relatively low monthly payments, but beware; the interest payment will fluctuate over the life of the loan. You start with a relatively low interest rate, but then it is readjusted at predetermined intervals. The interest rate will usually not increase more than 2% in any one year and 6% over the life of the loan.
• Balloon Mortgage: A balloon or short-term mortgage is sometimes a good option for buyers who don't expect to own their home more than five or seven years - which is usually the maturity date of the balloon note. Monthly payments are still based on a 30-year time frame, but the entire mortgage balance becomes due at the end of the five or seven year term.

There are other types of mortgages available for special situations, but be sure to get all the facts before choosing one of these mortgages:

• Subprime Mortgage: Subprime loans are designed for people with credit problems such as low credit scores, late payments or bankruptcy, who can't qualify for traditional, or prime, loans. Subprime loans have much higher interest rates because they are riskier for lenders.
• Reverse Mortgage: A reverse mortgage is a low-interest home loan for seniors that uses a home's equity as collateral. Rather than making monthly payments to the lender, you receive money from the lender. The loan does not have to be repaid until the last surviving homeowner moves out of the property or passes away. In the event of death, the estate has about 12 months to repay the balance of the loan or sell the home to pay off the balance.
• Interest Only Mortgage: With an interest-only mortgage, your monthly mortgage payment consists of interest payments only, usually for a period of five to ten years. During this time, borrowers can pay more than just interest, if they desire. Remember, payments will jump significantly once the initial interest-only period passes. Since this type of mortgage is riskier, they usually come with a higher interest rate attached.

Your home is an investment in your future, so be sure to do your research and take your time in finding the home mortgage that's right for you.