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If you're a first-time homebuyer, you know you'll need a mortgage to buy a house, but you likely don't know much about it other than it's a big loan. When you hear people talk about ARMs and amortization, they might as well be speaking another language. Unfortunately, this lack of knowledge can be costly when it comes to mortgages. Arm yourself with the right knowledge and you'll get the right loan with the best terms for you.
Is an Adjustable Rate Mortgage Ever a Good Idea?
With an ARM, the interest rate is always initially lower than a Fixed Rate Mortgage, but it fluctuates depending on the changing market rates. They typically start at a fixed rate for up to 10 years and change at regular intervals after that. If the markets skyrocket, so will your loan rate. This uncertainty drives most people to the security of a Fixed Rate Mortgage, which won't change over the life of the loan. The standard ARM is 5/1, which means the first five years are fixed and the remaining period adjusts annually. If you were only planning to keep the house for a shorter period, such as 5-7 years, then an ARM may save you money.
Don't Forget about PMI
Private Mortgage Insurance is something you'll need to obtain if you're using a conventional mortgage. (VA and FHA mortgages are guaranteed by the government so PMI isn't required; however, FHA requires you to purchase a government-provided insurance premium.) Requiring the borrower to pay for PMI is a way for conventional loan lenders to cover their risk for lending to you if your loan-to-value is above 80%. If you're putting up a down payment of 20% or more, you don't need PMI. However, PMI shouldn't be considered a bad thing. Yes, it adds to your mortgage payment without going toward your principal, but it allows you to obtain a mortgage if you don't have 20% to put down.
Using a Mortgage Broker Won't Cost You More
A mortgage broker is an intermediary between you and the lender. A broker gets all the information and paperwork needed for the loan and gives them to the lender. The lender pays the broker for its services, so it doesn't cost you any more than going through the lender. People often prefer using a broker because they make things easier than merely going through the bank.
If you go directly to a bank, it'll show you what it can offer, but a mortgage broker can show you the offers from several banks in an attempt to find the best rate and terms for you. Make sure to check your mortgage broker's credentials to ensure it's properly registered and licensed in your state, and check its Better Business Bureau profile for complaints.
FHA Loans Will Usually Save You Money
Federal Housing Administration loans usually have lower rates than conventional loans do because they're government-backed. Down payments for FHA can be as low as 3.5%, but they do require you to purchase two types of mortgage insurance: an upfront premium of 1.75% (which can be rolled into the loan) as well as a yearly premium dependent upon how much you put down. Your mortgage broker can provide you with details on which loan will work best for you.
You Can Refinance at Any Time
Say you get a mortgage, and not long after you've closed, rates begin to drop. Don't worry; you can refinance at any time. Keep in mind that each time you do, you'll be responsible for closing costs and fees associated with the new loan, so even though rates are lower, it may not save you money. Your lender or a mortgage broker can help you determine what your costs and savings would be before you decide to refinance.
You can also refinance to lengthen or shorten the terms of the loan. Lengthening your loan may help you out of a financial bind, but it'll cost you a lot more in the end. Shortening the length of your loan may raise your monthly payments, but it can save you a significant amount of money over the life of the loan.
Paying Points Can Save You Money
A point is 1% of the amount of your loan. Your loan may require you pay points to get a specified rate, but you can choose to pay more points to bring the rate down even more. If your goal is to stay in the house for many years, paying extra points should save you money. Points are fees and don't go toward paying down your principal. They're part of your closing costs, so if you're trying to save on those costs, go with zero points if you can. The good news is that points are tax deductible!
You Can Buy a House with a Bankruptcy on Your Credit
Contrary to popular belief, if you've recently filed for bankruptcy, it's possible to qualify for a mortgage, depending on the type of bankruptcy filed. If you're a veteran, you may qualify for a VA loan (because they're backed by the government) in as little as two years. If you're not, you may qualify for an FHA loan in three years if you can prove that the bankruptcy was due to an extenuating circumstance such as a serious illness or medical condition.
You'll Be Paying Mostly Interest for a Long Time
If you look at the amortization table for your mortgage–this table breaks down how much of your monthly payment goes towards interest and how much goes to your principal–you'll be shocked at how much is going to interest. It could be up to 10 years before the majority of the payment is going toward the balance. Most lenders will allow you to pay extra toward the principal along with your regular monthly payment, but make sure you note it on your payment slip.
For most people, a mortgage will be life's biggest debt. Mistakes can cost tens of thousands of dollars. If you take the time to learn about all your options and the costs and procedures that go along with procuring a mortgage, you can be in your new affordable home in no time.
National Debt Relief is one of the country's most popular debt settlement companies. We provide our clients with the help and education they need to manage their money and get on a stable and responsible financial track. Call National Debt Relief today at 800-300-9550 to find out how we can help you.