What is a mortgage?
A mortgage is a loan that closes the gap between the cash you have for a down payment and the purchase price of the home you're buying. Almost everyone takes out a mortgage since most people don't have huge wads of cash to spend on the perfect home.
Each month, you'll pay a certain amount toward the interest on the loan and a certain amount toward the principal (the original amount borrowed). At first you'll pay mostly interest, but as your principal shrinks, you'll pay more principal each month.
Never apply for a mortgage only at the bank where you have your checking account: There's a high likelihood you won't get a great mortgage in just one shot. It's best to shop around (after all, we're talking mucho dinero) and get a mortgage broker (someone who manages the bids from banks on your deal) to do the talking for you.
What's the difference between a fixed rate vs. adjustable rate mortgage?
There are two basic types of mortgages: fixed rate and adjustable rate. Fixed rate mortgages have interest rates that stay the same throughout the loan's life (usually 15 to 30 years). Adjustable rate mortgages (ARMs for short) have interest rates that vary over the course of the loan. Sometimes the rate varies every 6 to 12 months, and sometimes it varies every month. Usually, your ARM's interest rate will be tied to an economic index, such as the going mortgage rate. When rates are high, your rate will be high. When they're low, yours will be low.
If you're buying a home when interest rates are considered "historically low," it may be wise to choose a fixed rate mortgage. If interest rates are high and you think they'll decline, you may want an adjustable rate mortgage. Of course, it's not that simple. Check out these websites before making the big decision: quickenloans.com; mortgagemart.com; mortgage101.com; and irwinmortgage.com.
Do I need a down payment?
Many homebuyers place 20 percent down, but this isn't the only option. Some programs for first-time homebuyers, such as Fannie Mae, let you make a smaller down payment. Remember that you'll likely need to purchase mortgage insurance if you pay less than 20 percent down. It's also possible to pay more than 20 percent, depending on your financial situation, and some lenders may insist on it.
Do I need a mortgage broker?
If you find a mortgage that sounds reasonable, go to a broker who charges only the bank before signing: The broker may be able to find a better deal. You usually don't pay brokers -- the bank does -- and they're a good source of information, especially when you're tackling the buying process for the first time. And if you're feeling overwhelmed, a broker is a huge help in filling out the application and leading you through the process.
Will you get a tax break on a mortgage?
You won't get an automatic tax break, but you can deduct the substantial interest payments on the mortgage. Whether or not you receive a refund will depend on your income and loan amount. During your first year of homeownership, hiring an accountant to lead you through the intricacies of the tax system is a good idea.
by Justin Hartung
2/12/08
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