Getting a home loan is a bigger job than you might think... there is a lot to understand, especially for the first time borrower. Loan products, for example, encompass 30 year fixed rate, 15 year fixed rate, 7/1 and 5/1 ARM's, Jumbo loans, FHA loans, interest only loans, negative amortization loans and others require serious study to fully understand the economic pros and cons of each offer. The money isn't free either... you have to understand rates and points and other financial terminology like MIP, escrow, amortization, APR, simple interest, compound interest, future value, present value, etc. Confused yet?
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This is one of the major problems facing first time home buyers who are often overwhelmed by the variety of loan products, terminology and endless documents of legally binding fine print. Even seasoned borrowers may be set back due to the variety of "creative financing" options available today.
Especially troubling is the fact that home buyers tend to start to get their financing together either during or toward the end of their house shopping experience which is asking a lot from anybody, considering they also have to learn about real estate terminology and concepts before making a purchase. In other words, "it ain't easy to do it and do it right" without making serious mistakes in the process. These mistakes can cost you hundreds, if not thousands of dollars in both the short term and long run without you even realizing you got screwed until after it is too late.
So how does one prevent being raked over the coals in a real estate deal, especially the home financing? The answer, without exception, is to get knowledgeable about home financing and don't agree to or sign legal documents you don't understand. The bottom line is this: if you don't fully and completely understand the home loan product you are borrowing, don't sign anything.
One of the best ways to get educated is to get a HUD settlement booklet from the Housing And Urban Development HUD provides a TON of information to help you understand many details of home buying and mortgage borrowing and covers predatory lending, home buying, home selling, ownership, and a boat load of other useful information to help you protect your legal and financial interests.
You can also talk to your local bank and a couple mortgage companies to get information on home loan products. Loan officers work with these loans everyday and know them like the back of their hand. The good mortgage lenders don't mind taking the time to work with you because they might end up getting your business when you borrow a mortgage and they will spend time with you to get that business. In any case, make sure you talk to at least 3 mortgage lenders so that you can compare what you are being told from one to the other and take notes.
Avoid gimmick loans if you can and stick to traditional 30 year fixed rate deals, they tend to work best for most people. There is no benefit of a 15-year mortgage over a 30-year mortgage except that a 15-year fixed rate mortgage straps a higher monthly payment on your back. Sure, you can pay the loan off quicker but if anything happens to your income, you are stuck with a high monthly payment. It is better, in my opinion, to take a 30-year fixed rate loan with a lower monthly payment and make one or two additional principal payments per year (write a letter with the payment telling the lender to apply it directly to principal). In this way, you can pay off the mortgage in 15-years and if, for some reason your income changes, you will be able to afford the lower monthly of the 30-year mortgage.
You want to avoid paying points for a lower interest rate too. In essence, when you pay points to a lender for a lower rate you are basically pre-paying the lender the interest in advance. Why pre-pay the interest on a 15 or 30-year mortgage when you may only live in the property for 5 to 7 years, the national average? The key is to get smart before you do anything, right?
Best of luck!
Copyright © 2007 James W. Hart, IV,All Rights Reserved
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