Mortgage FAQ

General Information about Mortgages

Mortgages are loans on a house. The interest you pay on a mortgage is tax deducible but that does not mean you get all of the interest you pay back just the percentage that you would have had to pay taxes on if you had not been able to deduct it. If you miss your payments though, it does mean the bank or whoever you got your loan from can reclaim your house and you could go without a house and not get back any of the payments you had made so you have to make sure not to miss any payments. Normally, before reclaiming your house they will give you a period in which to make your payment and warn you before they come and evict you. You will want to get the lowest interest rate possible on your loan so most of your money goes to pay off the principal (the actual loan amount) and not to interest. You should also make the highest monthly payment possible so your loan will be paid off quickly and you will pay less interest. Ways to reduce the interest you pay: pay a larger down payment, make the loan term shorter (increasing the monthly payment and decreasing the amount of your payment that goes to interest), have a good credit standing (will decrease interest rate), and have a longstanding job (will also decrease interest rate). Having the lowest interest rate and the largest payment will save you the most money in interest. When you get a mortgage, you want to make sure you are able to pay it off at any point with little or no fees so that if interest rates go down you can get a new mortgage with the lower rate and save money on interest. Also, when you get a mortgage you will have a choice between a fixed or adjustable mortgage though the interest rate for the fixed mortgage may be higher than the interest rate for the adjustable mortgage if interest rates go up the rate on the adjustable mortgage will go up causing you to have to pay more interest so a fixed rate is better if you can pay it off because you can get a new lower rate fixed mortgage and keep the lower rate if interest rates go up but with an adjustable the rate could go down or it could go up!

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Advantages of Having a Mortgage

Instead of having a personal loan for $20,000 to finish paying off your house a mortgage may save you money because you can deduct the interest you pay on the mortgage from your taxable income. If the mortgage interest rate is higher than the personal loan rate though, you should spend a little time to calculate out how much you would save with the tax deductible mortgage interest or if you would end up paying less money for interest if you got the personal loan that you could not save tax money on.

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Disadvantages of Having a Mortgage

Disadvantages of a mortgage are the amount of interest you will end up paying over the time period of the mortgage which could be as much as twice the amount your mortgage is for because it compounds. In addition, the payments you make on the mortgage will cut deeply into what you have to spend on other things.

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Another view on Mortgages

Most lenders will want to limit your mortgage payments to approximately 28 percent of gross income, and your total debt payments to about 36 percent of gross income. So, if you earn $50,000 per year, look for a mortgage payment of no more than $1,167 per month, assuming your total monthly debt repayments -- including the mortgage payment itself -- stay under $1,500.

Besides your income, the following additional factors will effect what mortgage you qualify for: Credit standing: Too much outstanding credit, high balances in proportion to available credit, missed mortgage payments or late payments can all tarnish your creditworthiness. Other personal and employment information: Length of stay in current job, for example, will impact the loan decision. Availability of a cosigner: A second party who will make payments in your stead can improve your chances for loan approval. 2. Mortgage Variables Term: 15-year or 30-year. A shorter term means higher monthly payments, even though the 30-year rate will probably be higher.

Interest Rate: fixed mortgage or an adjustable mortgage(variable). Fixed rates are typically higher than initial adjustable rates, but with a fixed rate loan you always know what your mortgage payment will be. With adjustable, your rate could shoot up several percentage points over time. Points: These are up-front payments to the lender; usually you can trade off higher points for a lower interest rate mortgage. Note that you normally can deduct points on the purchase of your primary residence on your tax return. If you don't plan on staying in the house for a long time, opt for fewer points for your mortgage.

Closing costs: In addition to points, other up-front costs could include application fees, costs of running a credit check, attorneys' fees, title search and appraisal fees. Excluding points, try to keep closing costs under two percent of the loan amount. Jumbo vs. conventional loan: Jumbo loan rates are higher than rates on smaller conventional loans. For a single family detached house the cutoff point for a conventional mortgage is $240,000.

Mortgage insurance (PMI): Insurance protection for the lender that is required if your equity is below 20 percent; once you build up enough equity, you need not pay for mortgage insurance. Down payment: For a single family home, the minimum down payment is five percent, but lenders often like at least a 20 percent down payment. The higher your down payment, the lower your monthly payment will be. Lock in period: The period of time that a lender will guarantee an interest rate offer, often 30 to 45 days. You should close on the property prior to expiration of the lock in, especially if you think interest rates might rise. Shop both online and offline for best mortgage, and be sure to talk to your local banker to see what kind of terms they're willing to offer you. An established relationship could help you land a better deal.

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