New to Home Mortgages? These 800 Words Will Save You Days!

Home ownership is a goal for almost every American today. It’s one of the most important financial decisions you can make, and with interest rates and home prices at rock bottom from the recession, it’s an excellent buyers’ market. A home is a great investment because the appreciation of the property value historically out paces inflation, and, as opposed to renting, part of your monthly payments contribute to the equity in your home. When you’re ready to buy a home, the first thing you should do is figure out the type of mortgage loan that fits your budget and lifestyle.

All potential homeowners should take some time to research home loans before calling their local Realtor. There are a dazzling array of choices available when it comes to home loans, and finding the right mortgage for your needs can be difficult. Approach your upcoming home purchase with the same seriousness you apply to other major purchases. Your home will most likely be the biggest single investment you ever make. Take the time at the beginning to educate yourself about home loans. It will be time well spent.

To begin your home mortgage search, talk to credit unions, banks, and brokers in your area. You’re looking for someone to hold your hand through the process, but you also want a decent rate with low fees, so make sure to shop around.

You will also have to decide between fixed rate home loans and variable rate home loans. Variable rate home loans are often advertised with extremely low “teaser rates.” These rates are used by lenders to get your attention and lure you in.

ARMs have two specific things you look for to use in your analysis – when the rate adjusts (anywhere between one month to 10 years) and what the cap on the interest rate is. Usually, the rate will adjust to whatever the prime rate (the federal government chooses this number) is at the time of the adjustment, plus a certain percentage of ‘mark-up’ that pays the bank. When you discover the rate cap, use a mortgage payment calculator to find out how much your maximum monthly payment is, worst case. That’s not to say your mortgage will actually adjust to that rate, but it’s a prudent idea to plan for different scenarios – including worst case.

Variable rate home loans can be a good choice if you believe interest rates are likely to fall. In an environment where interest rates are steady or rising, they may not be so good a choice. You may also want to consider a variable rate mortgage if you do not plan to stay in your home more than five years. For instance, if your job transfers you every couple of years, you could probably get away with a variable rate mortgage and take advantage of the lower interest rate. When you move and sell your home, you will probably realize a gain due to rising home prices.

Fixed rate mortgages are less complicated than ARMs because you know exactly what your payment is for the life of the mortgage. The fixed rate, as it implies, locks in your interest rate for the entire duration of the loan, which is great for current economic times with low interest. This type of mortgage protects you if interest rates go up, and if interest rates fall, you’ll have the option to refinance at the lower rate.

Your mortgage term, or length, is another deciding factor of how much interest you’ll end up paying. With a longer term, you’ll pay more interest since your loan is amortized over more years – creating more compound interest. If you need the flexibility to make smaller payments by taking on a longer mortgage term, you can always pay more toward your principal at any time to help reduce the length of the loan. Just by paying a few extra principal payments/year can save you tens of thousands of dollars in interest!

Becoming a home owner is an important step in everyone’s life, and with the right home mortgage loan, it can be just as affordable as your rent payment. Start building equity and investing in you home today – you’ll look back on this moment and be glad you did.

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