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Mortgages 101

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Get Preapproved

By getting preapproved you will save yourself time, help narrow your choices, get a realistic look at what type of house is in your budget, and start your relationship with the bank. Pre-qualification is just the first step, but you want to go for the whole pre-approval process. They’ll check your credit score (which falls between 300 and 850 and gives an idea of how reliable and desirable of a candidate you are when it comes to paying off loans), as well as your income, assets, and any other financial information. You should also shop around with different lenders to find the best deal.

 

Fixed vs. Adjustable vs. Interest Only

            Mortgages are not all created equal, and while there are several variations, most of the information has to do with interest rates that you will be paying on your loan for the long haul. Educate yourself on the different kinds of loans available to you.

A fixed-rate mortgage (FRM),often referred to as a "vanilla wafer" mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, 15 years, 20 years, 30 years, etc.

Fixed Rate Pros

  • You know exactly what you’ll be paying each month for the life of the loan.
  • There’s no stress if rates go up.
  • It is easy to shop around and compare rates.
  • The math involved with your loan is straightforward.
  • It can save you money if you keep your loan long-term and rates go up

Fixed Rate Cons

  • FRMs may not be the best option for people looking to sell or refinance soon.
  • You’re stuck with the rate you locked in until you refinance.
  • Falling rates can give you a case of buyer’s remorse.

 

An adjustable-rate mortgage (ARM), is a loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.

Adjustable Rate Pros

  •  Low payments in the fixed-rate phase.
  •  Flexibility
  • Rate and payment caps.
  • Payments could get smaller

Adjustable Rate Cons

  • Your payments could get bigger. 
  • Things don’t go as planned.  
  • Prepayment penalty. 
  • ARMs are complex. ARMs can have complicated rules, fees and structures.

 

An interest-only loan is a loan in which the borrower pays only the interest for some or all of the term, with the principal balance unchanged during the interest-only period. At the end of the interest-only term the borrower must renegotiate another interest-only mortgage, pay the principal, or, if previously agreed, convert the loan to a principal-and-interest payment loan at the borrower's option.

 

Interest Only Pros

  • Buy a more expensive property
  • Free up other money
  • Keep your overall costs low

Interest Only Cons  

  • No equity
  • Upside down risk
  • Putting off the inevitable

You got the loan, but can you pay the loan.

Is $2,700 in monthly repayments really affordable to you? Are you looking at houses that come with large HOA fees or apartments with large Co-op fees? Just because you can get a loan for a certain amount, doesn’t always mean you should take it. Crunch the numbers in your budget, after the bank crunches theirs. On top of housing costs, you need to remember you may incur other expenses such as closing costs, taxes possibly, moving costs, and furnishing costs. 

 

Refinancing

Once you are settled with your loan and in your new home, keep the notion of refinancing in your back pocket. Refinancing means to finance your home again, typically with a new loan at a lower rate of interest.The process of refinancing allows you to get a new loan and agreement — this can mean paying off your mortgage faster and, ultimately, paying less interest in the long run.