Understand the Mortgage Before Purchasing a Home

Understand the Mortgage Before Purchasing a Home
By [http://ezinearticles.com/?expert=Kimberly_T._Michelle]Kimberly T. Michelle

If you are thinking about purchasing a home, it is very important to understand mortgages. The benefits of owning a house are manifold. For example, it allows you to build equity and there is a tax deduction benefit for the tax payer on mortgage interest that is paid. In addition, the pleasure of staying in your own house is one of the biggest advantages of investing in the purchase of a home. The monthly payouts increase when you purchase a house and money needs to be kept aside for unexpected expenses.

Clear Existing Debt

As soon as you decide to purchase a home, you first need to check your credit report. It is better to close the credit cards that you never use. If there is any discrepancy in creditors' reporting, you should have it corrected. It is important to save as much money as possible for the down payment, however, you should not overlook the high interest rate debt. Do not use credit cards that have high prime rates and pay off all existing debts.

Choosing a suitable Lender

You can look for lenders online and can easily find details of lenders in your area. Narrow down your choice to three to four lenders and then obtain a copy of a good faith estimate or HUD-1 form from them. Analyze the charges on the HUD-1 form and once you finalize your choice of lender, allow them to check your credit report. You can negotiate on the loan origination, processing and underwriting fees with the lender. Avoid a lender who charges points, as when you pay points, the amount of down payment is increased.

It is better to hire a knowledgeable real estate agent who can tell which costs are flexible and can be eliminated and which ones you may need to bear.

Why Lenders charge PMI

Most lenders charge first-time buyers PMI (Private Mortgage Insurance) if they do not make an initial down payment of 20% or more. This insurance does not cover you but provides cover to the lender in case you default on the loan. On average if you take a loan of $200,000 and make a down payment of 10%, the PMI charges per month are around $100. When you reach an equity percentage of 20% of your home, you can cancel the PMI.

How to arrange for the Down Payment

In case you cannot afford a down payment of 20% and do not wish to pay PMI, you can take an additional home equity loan. The additional loan that you take must be paid off first, as it is likely to have a higher rate of interest.

Types of Loans

There are two main types of loans:

1) Fixed-Rate Loans

The most common loan is a 30-year, fixed-rate loan in which the interest rate does not change. The 15-year loan is becoming more popular as the total amount of interest that you pay is less, although these loans have a high rate of interest.

2) Adjustable-Rate Loans

These offer a lower interest rate for a fixed time period and should be considered if you plan to stay in the new home for a short time only. These are listed as 3-1, 5-1 or 7-1, which means the loan rate is fixed for an initial period and then changes every year, based on market conditions.

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