The vast majority of homebuyers use some sort of mortgage, in order to be able to afford, buying their home. Since one’s house, is their single, biggest financial asset, wouldn’t it make sense, to clearly identify, issues which might impact the borrower, and be ready, willing and able to proceed, in the best possible manner. With this in mind, this article will briefly attempt to examine and discuss, using the mnemonic approach, some of the potential PITFALLS of any specific mortgage, and, hopefully, assisting these individuals, in being, as well prepared, as possible.
1. Points: When comparing various, available mortgages, naturally, one hopes to pay the lowest, possible interest rate, he qualifies for, and is available! However, one of the most misunderstood items, is something, known as, paying, points. In mortgage lingo, a point translates to something pre – paid, to lower the overall, monthly rate, to be paid. One point equals 1% of the amount of the mortgage principal. For example, on a $500,000 mortgage, one point would amount to pre – paying $5,000, upfront!
2. Interest rate: Consider the stated interest rate. Is it a fixed amount, for the life of the loan, or variable (which means, will change, after certain periods, and adjust)? Monthly mortgage payments consist of a portion for principal repayment, another for interest, and another part, for escrow (which equals real estate tax, insurance, etc)
3. Term: How long is the term, of the loan? Most fixed mortgages have either 30 or 40 – year, terms (although 30 years, is prevalent), while 15 – year mortgages, generally carry a lower interest rate (but higher monthly payments). If a variable mortgage is used, identify, the initial term of the guaranteed rate, as well as how often the rate changes, after the first period. Also, discover and know, how this adjustment might be based/ determined!
4. Fixed (versus variable): Know the advantages of a fixed, versus a variable loan, and vice versa! There is often a lower rate, for variable loans, but fixed ones are guaranteed, at a specific rate, for the life. Which is best for you, is often determined, by how long, you plan, to remain in the house!
5. Aims: Do you plan to live in this house, for an extended period, or is your aim, to move – on, in a relatively shorter period of time? Knowing your aims, helps you best decide, what type of loan, you should seek!
6. Length: Mortgage terms vary in length. While some are 30, or even 40 years, in recent times, many have used 15 – year loans, in order to pay, far less, total payments, over – time! Variable – term mortgages, often, vary in length, with most either being, known as 7/ something, or 10/ something! The second number refers to, how often, after the initial period, the rate changes, etc.
7. Liquidity: These days, there are very few pre – payment penalties. Some loans might be transferable, and if so, this might help, in marketing the house, in the future!
8. Serve your needs: There is no such thing, as one – size, fits – all, when it comes to determining the best mortgage, to serve your personal needs and circumstances!
If you understand, fully, the PITFALLS, of securing the best financing, for your home, you will be, best prepared, to be a happier, homeowner! Will you be as ready, as you might possibly, be?