Home Loans - The Basics
A standard mortgage is the way most people buy a house. With long term financing
mortgage loans can allow families to own a home for about the
same monthly payment as rent. Typical home mortgages run fifteen
to thirty years although shorter and longer terms are available.
Such a loan usually requires a down payment of twenty percent.
If the borrower cannot come up with that much down payment,
there are other options such as Private Mortgage Insurance
(PMI). In this case the borrower might only put down five
percent yet provide the lender with the assurance that the
loan can be repaid if the borrower defaults. Typically such
insurance will add one half a percent (based on the initial
cost of the home) to the total interest rate on the home.
Owning A Home vs. Renting
While owning a home is the American dream, it comes with responsibilities.
Renters who buy a home for the first time may not be used to
the maintenance required, since the rental property landlord
was obligated to do that in the past. In addition to home repairs,
home owners need to pay insurance (usually homeowners insurance
and flood or earthquake insurance) plus property taxes. All
of these expenses should be factored in when considering a mortgage.
Mortgage Rates and How They Are Determined
There are several ways that interest can be charged with a mortgage. The
interest rate can be fixed for the period of the loan or it
can be adjustable (ARM). An adjustable rate will go down when
interest rates go down and go up when interest rates go up.
These are usually based on an index that will be specified by
the lender, such as the interest rate for US treasury bills.
In addition the time period during which adjustments can be
made can vary. The consumer should understand exactly how payments
can vary under an adjustable rate mortgage and realize that
payments could increase considerably.
In addition to the interest rates lenders often charge points and there may
be substantial closing costs which are paid by the borrower.
These should always be calculated together to obtain a true
interest rate which will vary from the stated interest rate.
Shopping for the best rate with a home mortgage company is
well worth the time, since the loan is for a large amount
of money, often more than one hundred or two hundred thousand
dollars and the loan is long term. Just a half point drop
in interest can make a big difference in the monthly payments
required. Also lenders who charge fewer points are, in effect,
giving the consumer a lower interest rate. For example, a
half percentage difference can cost about $35 more per month
on a home loan of $100,000 for thirty years or more than $400
per year or a total of $12,000 over the term of the loan.
Closing The Mortgage Loan and Paper Work
After being approved for a loan, a home purchase still requires a lot of
paper work known as closing costs. These include a title search
to make sure that the seller has a clear title to the property
and that there are no liens on the home, an appraisal may be
required, and a credit check of the borrower will usually be
required. After the sale and transfer of the title, the title
must be recorded usually at the registrar of deeds at the county
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