Are you ready to buy a home, but you are dreading trying to find a mortgage that fits you? Understanding mortgages is not scary as long as you understand how they behave. Buying a home is a big step and making sure that you can afford a house is very important. Due to the recent housing boom, many mortgage lenders have been very creative with selling loans to folks by making it look like they can afford a certain house when in reality those people are becoming house poor. It is very easy to become house poor if you get creative with certain mortgage products out there. The definition of house poor is when a mortgage payment is more than 25% of one’s household income. To make sure that you do not become house poor, let’s look at the two most common mortgage products and figure out which one is right for you.
Fixed-Rate Mortgages: These are the most common and plain mortgages that are on the market. Most people typically buy them for a 15, 20, or 30 year period. However, make sure that you remember that some lenders will create a customized loan for you if you only want to borrow for 7 or 10 years. These mortgages lock in a fixed interest rate for the life of the loan. If you buy a 15 year loan, it will come with a lower interest rate than a 30 year loan.
Adjustable Rate Mortgages (ARM): An adjustable rate mortgage is just what it sounds like. The interest rate will stay fixed for a certain number of years such as 3 or 5 years, and then after that the interest rate fluctuates according to the current market’s interest rate. This means that your payment will go up if the interest rate goes up. Usually there is a cap that is associate with an ARM in which the interest rate can only rise so high before stopping.
If you have never seen the way a mortgage loan amortizes or if you do not know what amortizes means, then PLEASE go to a mortgage calculator website and play with the calculator. This will show you the breakdown of every payment that you make, and it will show you how much interest and principal is being paid for each payment.
The mortgage that I recommend is a 15 year fixed-rate mortgage, because this is loan represents the best way of knowing if you can afford a certain house. With a 15 year fixed-rate loan, you will lock in a low interest rate, and you will pay the least amount of interest over the life of the loan. Adjustable rate mortgages look nice at first because they give you a low interest rate, but what if you live in the house more than 5 years and the rates go up drastically over that time? You payment may go from $1,000 a month to $1,600 a month. That might put a strain on your budget. If you pick a 30 year fixed-rate mortgage, realize that you’ll be paying double for that house by the time you pay it off.
Make sure that you have a good down payment when you buy a house! Buying a house gives great tax advantages, and you eliminate that annoying landlord, but do not rush into buying a house! It is a huge financial, mental, and physical commitment. Not only do you have to pay the mortgage payment, but you will have to factor in homeowner’s insurance and property taxes. Yes, renting is throwing away your money, but think of it as being patient until you are ready to buy a house.