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1. Do you
know what you are buying?
Well, you
might say that a house is a house is a house. But the English
language - the American version in particular - distinguishes
between different kinds of dwellings.
When people
say a "house" they usually refer to a single entity that
comprises several rooms, on one or several levels. It is easier to
picture it if you compare it to an apartment building or some type
of communal house. It's the good ol' house with a back and a front
yard, a dog house and, if you are fortunate and rich, a swimming
pool and a Jacuzzi.
In contrast
an apartment is a unit within a larger building that contains
several similar units. In America typically an apartment is for
rent. When people buy them they refer to them as "condos". An
apartment building will not usually contain rental units, though it
is very common for people to buy condos then rent them out. Then
they become "apartments" for the renters.
A
townhouse is a more complicated thing to describe. It is what's
called a "row house", especially a fashionable one. It is a hybrid
between a condo and a house. It may have a back and a front yard,
but it is typically attached (as in back to back) to another (or
several others) similar unit.
2.
Coming up with the money
Unless your
dad owns an oil field somewhere in the world or you come from a long
lineage of really, really rich people, you won't be able to come up
with all the money up front. So you borrow it. And that's when it
gets complicated.
A loan for
a house is called a "mortgage". In order to procure such a
loan you need, well, a lender. It is typically a bank or a mortgage
company - specialized in precisely this: lending money to people who
need and want to buy a house.
Most people
will go through a private company to find the money to buy their new
home, though there are numerous federal programs that will help
people with this. They have programs for first-time buyers, for
Veterans, for immigrants or other special types of people. Do your
research. You could end up with a very low interest rate. A good
website to start at is
www.hud.gov.
Government
housing loans help lower the costs of mortgages so that more people
can afford to own their own home. There are three government
agencies that insure mortgages. The Federal Housing Administration
(FHA), which is part of the
U.S. Department of Housing and Urban Development, the
Veterans Administration (VA), and the
Rural Housing Service (RHS), which is a branch of the U.S.
Department of Agriculture. Only approved lenders can offer these
loans, and there will be required standards that the property has to
meet in order to qualify.
In order to
get approved for a money loan, you need to have a "credit history",
which is a record of all your payments to various entities such as
utility companies, credit card companies, schools (if you have
student loans), or car dealers (most people buy their cars "on
credit"). If you have a good credit history because you always pay
your bills on time, you will probably get approved fast and your
interest rate will be low. It is an invaluable record and it will
help you conquer otherwise insurmountable financial obstacles. You
need to build your credit as soon as you set foot in this country.
More on this here (click).
3.
Again, what is a mortgage?
According
to
Webster's, a mortgage is "the pledging of property to a
creditor as security for the payment of a debt." In plain terms, it
is the legal contract that says if you don't pay the loan back
(along with all of the fees and interest that are included with it),
then the lender can have your house.
The lender
holds the title to your house until the debt is completely paid off,
and the lender will sell your house in order to get the money back
if you can't make your mortgage payments.
Your
down payment is the lump sum you pay upfront that reduces the
amount of money you have to finance. You can put as much money down
as you want, or you can sometimes pay as little as 3 to 5 percent of
the purchase price. The more money you put down, though, the less
you have to finance and the lower your monthly payment will be.
The
mortgage payment is made up of:
-
Principal - This is the total amount of money you are borrowing
from the lender (after you've made your down payment). It is the
amount of money you are financing (taking a loan for).
-
Interest
- This is the money the lender charges you for the loan. It is a
percentage of the total amount of money you are borrowing. For
example if you are borrowing $100,000 you may get charged 5% every
month.
-
Taxes
- Money to pay your property taxes is often put into an escrow
account, meaning that the money is placed in the hands of a third
party until it is time to pay or certain conditions are met. A
portion of your property tax is added to your monthly mortgage
payment and held in escrow until it is due. Property taxes are
assessed by your local government and the money is used to build
roads, maintain public schools, repair and install street lights and
other projects. You can't get around taxes. Can't buy a house if you
don't pay them - and the government wants to make sure of it. That
is why there is such a thing as "money held in escrow". The lender
sets up a separate account in which this money will be held until it
is actually due.
-
Insurance - There are several types of insurance that can come
into play when you get a mortgage. You'll have hazard insurance to
protect against losses from
fire, storms,
theft, etc., and if your home is in a
flood risk
zone and you're getting a federally insured loan, you'll have to get
flood insurance. Unless you have at least 20 percent equity in your
home (you own 20% of it; another way to put it is that you paid 20%
of the full price of the house), you'll also have to pay private
mortgage insurance (PMI). This can sometimes be pretty expensive, so
it makes sense to put as much into your down payment as you can.
4.
Paying off your mortgage
Mortgages are typically paid off in
incremental payments that gradually chip away at the principal of
the loan. This is called amortization. The portion of your
payment that goes to pay the interest is much higher than the
portion that goes to the principal -- at least for the first several
years.
These payments are precisely calculated
and scheduled to pay off the loan in a specified period of time.
5. Types of mortgages
There are many types of mortgages you can
choose from. Which type you choose usually depends on the length of
time you think you'll be in your home or the other financial
obligations you have. If you think you'll be there for the long
haul, then you may want a fixed rate mortgage with the lowest
interest rate you can get.
There may be other
considerations, however. What if you have kids who are going to be
entering college in 10 years? In that case, you might consider
getting an adjustable rate mortgage, or a mortgage with a balloon
payment so you can keep your payments low for the first few years in
order to save for
college. Once the kids are out of college, you can refinance at
the current rate. If you don't think you'll be in your home for that
long, then you may also want to look at other options
-
Fixed-rate
mortgages: this mortgage offers an interest rate that will
never change over the entire life of the loan. If you lock in a
rate of 7 percent that calculates a payment of $1,247 per month,
then you know that in 20 years you'll still be paying $1,247 per
month. The only things that will change will be the property tax
and any insurance payments that are included in your monthly
payment.
-
30-year
fixed-rate - The 30-year term gives you the maximum tax
advantage by having the greatest interest deduction. While the
fact that you're paying more interest may not seem like a
benefit, you make lower payments with the longer term fixed-rate
loan and you get a bigger tax deduction. If you will be staying
in your home for many years (especially if you think your income
may not increase tremendously), this may be the best option.
This type of loan is also the easiest to qualify for.
-
20-year
fixed-rate - You can shorten your mortgage by 10 years and
usually get a lower interest rate with the 20-year mortgage.
These aren't offered through as many banks and lenders, however,
so you may have to shop around to get one. The advantage with
the shorter term, besides paying your loan off sooner, is that
you'll also have more equity in your home sooner than you will
with a 30-year loan. Your payments will be higher, however.
-
15-year
fixed-rate - This loan term has the same benefits as the
20-year term (i.e., quicker pay-off, higher equity, lower
interest rate), but you will also have a higher monthly payment.
-
Adjustable-rate
mortgages: An adjustable-rate mortgage (ARM) has an interest
rate that changes based on changing market rates and economic
trends. They usually offer an initial interest rate that is two to
three percentage points lower than fixed-rate mortgages, but they
don't offer the stability or assurance of a known mortgage payment
in the years to come. If you don't expect to be in your home for
many years, however, an ARM may be just what you need.
-
Balloon mortgages:
A balloon mortgage offers an initial interest rate that is lower
than fixed-rate mortgages. It keeps this low fixed rate for five
to seven years and then requires a "balloon" payment. The balloon
payment is the final payment of the loan and pays off the entire
balance.
6. The APR
Probably one of the most
confusing things about mortgages and other loans is the calculation
of interest. With variations in compounding, terms, and other
factors, it's hard to compare apples to apples when comparing
mortgages. Sometimes it seems like we're comparing apples to
grapefruits. For example, what if you want to compare a 30-year
fixed-rate mortgage at 7 percent with one point to a 15-year
fixed-rate mortgage at 6 percent with one-and-a-half points. First,
you have to remember to also consider the fees and other costs
associated with each loan. How can you accurately compare the two?
Luckily, there is a way to do that. Lenders are required by
the
Federal Truth in Lending Act to disclose the effective
percentage rate as well as the total finance charge in dollars.
The annual percentage
rate (APR) that you hear so much about allows you to make true
comparisons of the actual costs of loans. The APR is the average
annual finance charge (which includes fees and other loan costs)
divided by the amount borrowed. It is expressed as an annual
percentage rate -- hence, its name. The APR will be slightly higher
than the interest rate the lender is charging because it includes
all (or most) of the other fees that the loan carries with it, such
as the origination fee, points, PMI premiums, etc.
7. Closing Costs
Getting a mortgage for a
home will cost more than just your monthly payments. Once a sales
contract is signed, a series of events will pull together a group of
people that will be involved in the closing process. "Closing costs"
are the fees associated with the work these folks do, as well as
taxes and insurance that must be paid when the loan is closed.
The amount of money
you'll have to pay in closing costs varies a lot by region. If you
live in a high tax area, for example, your closing costs will be
higher. Also, realtors, lenders and attorneys have differing fee
scales depending on the markets they are in. Typically, you will pay
anywhere from 3 to 6 percent of your total loan amount in
closing costs -- that means $3,000 to $6,000 if you get a $100,000
loan.
The fees for services
involved in closing a mortgage fall into three categories -- the
actual cost of getting the loan, the fees involved in transferring
ownership of the property, and the taxes paid to state and local
governments.
As you can see, buying a
home is quite a complicated affair. This "brief" introduction is not
exactly brief - and we have barely scratched the surface.
The bottom line is that
you need to, as they say, "do your homework". Pick up the Yellow
Pages in your area and call the government agencies listed in the
first few pages for brochures and packages of information on the
subject. A lot of it is free.
Many lenders, banks,
realtors and mortgage companies will also send you packages of
information free of charge. Get them - and read them. If you need
help, most people working for these companies will be more than
happy to help you. Good customer service goes a long way.
Also, don't let yourself
be bullied or scammed. If something smells fishy or is too good to
be true, you are probably right. Ask for a second or third opinion.
Don't be intimidated, afraid, or ashamed to ask questions. Many
people who are born and raised here to not know these things and
need to get educated about them.
The Internet offers a
lot of information on the subject, but it can be rather confusing.
When in doubt, go with a government website - or check with your
local library.
Good luck!
Please send your comments to the
editor@sentimentalrefugee.com
Note: excerpts from "How Mortgages Work" by Lee Ann Obringer
published on howstuffworks.com.
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