Home Builder Guide

What You Need to Know About Mortgages

Very few of us make six-figure deals on a regular basis. For the vast majority of us, our mortgage is by far the largest financial deal we’ll ever make. So it’s well worth taking the time to figure out exactly what we want.

The good news is, you don’t have to understand absolutely everything about mortgages. As a home-buyer or home-builder, what you really need to do is:

• Understand interest rates
• Understand different kinds of mortgages
• Think about the property market’s future – and your own

Interest Rates:
 The interest rate that comes with a loan tells you how much extra you’ll repay, as well as repaying the actual money you’ve borrowed. It’s important to realize how much of a difference even 0.5% can make. What’s more, the bigger the loan and the longer the repayment term, the more important that difference will be – and since most mortgages are very big and repaid very slowly, interest rates really matter!

Two examples…

With a $5,000 loan, repaid over 5 years:

  • a 5% interest rate could cost you     $5,661
  • a 5.5% interest rate could cost you   $5,730

So that extra 0.5% could cost you another  $69

With a $250,000 mortgage, repaid over 20 years*:

  • a 5% interest rate could cost you    $395,973
  • a 5.5% interest rate could cost you  $412,732

So that extra 0.5% could cost you another $16,759

* Mortgages aren’t normally 20 years long, as most people prefer to take a series of shorter mortgages, so they can take advantage of changing economic conditions. But sometimes a long mortgage does make sense – some savvy homeowners, for example, will guarantee themselves 20 years of low payments by arranging a 20-year fixed-rate mortgage when interest rates are particularly low! Another option that is available for the borrowers is the 40-year mortgage loan. The most important benefit of this type of a loan is a reduced monthly payment.. However, the interest rate charged is higher than the 20 or 30-year mortgage loans.

Different kinds of mortgages:
There are all kinds of mortgages, but the most important question is probably this: fixed-rate mortgage or adjustable?

Adjustable-rate mortgage (ARM):
As the name says, adjustable-rate mortgages change over time. The interest rate (and therefore your monthly payments) will go up or down when a certain ‘index’ does. This index could be the Cost of Funds Index (COFI), for example, or the London Interbank Offered Rate (LIBOR).

So if you think the cost of mortgages is going to come down, an adjustable mortgage could be tempting. Just remember your monthly payments could always end up increasing – in general, an ARM is only a good idea if your budget can cope with unexpected increases.

Fixed-rate mortgage:
When you sign up to a fixed-rate mortgage, you’ll know exactly how much interest you’ll pay – and therefore how much each monthly payment will be – until the day the mortgage ends.

So a fixed-rate mortgage offers security, making it a lot easier to plan your finances. Anyone with a fixed-rate mortgage doesn’t have to worry if interest rates go up, but on the other hand, they won’t benefit if they go down.

Which is right for me?
There’s no simple answer. If one kind of mortgage was indisputably ‘better’, the other wouldn’t exist. So it’s all down to you and your individual circumstances: not just how much you’re earning now, but how much you expect to earn in the future, and how much risk you’re comfortable with.

Future of the property market:
What’s next for house prices? If you knew the answer, you’d be in a much better position to protect yourself from (and perhaps take advantage of) the housing market’s current woes. Nobody, of course, actually knows. You’ll hear all kinds of guesses, calculations and hunches, but no-one will be able to name the ‘moment’ when prices stop falling until it’s in the past.

Anyway, your own financial situation is probably more important to you. Whatever is happening to prices across the US, ask yourself the following questions:

• Could I arrange an affordable mortgage?
• Could I afford a decent deposit?
• Is this the right time for me to settle down anyway?

Finally, there’s a very important question which all too often gets overlooked: What’s the alternative to buying?

For most people, the alternative is renting, and never forgets that rent money is essentially ‘dead’ money – whatever happens, you’ll never get it back.

Let’s finish with a small example:
•  Mr. Jones is renting a flat for $1,250 per month.
•  He’s thinking about buying a house, but house prices in his area have dropped by $12,000 in the last year. He’s worried about losing money if he buys before house prices have finished falling.
•  However, as long as the house’s price drops by less than $15,000 in a year, it’s actually cheaper to lose that money than to rent for another year – and anyway, he’d only ‘lose’ it if he buys the house and sells it before house prices recover.

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Useful Resources:
Denver Home Loans – The best lender in denver area. For the home loan related query checkout.

XPX – We are Canada’s first integrated real estate network where Builders, Realtors, FSBOs and Landlords can Sell or Rent out multiple properties on a do-it yourself interface. XPX.ca | A Real Estate & Mortgage Company and public MLS. Now That’s Real Estate!

Loans Online Resource : Loans and mortgages guide to help consumers make the right decisions. Find everything you need to know about getting a loan or mortgage.