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The single
most important aspect of your
home purchase is the loan,
or mortgage, you obtain. The
amount of this loan will be
decided by the price of the home
and your down payment.
Generally,
the amount of your down payment
and income/debts control the
price range of homes you can
look for, and hence, the size of
the loan you will need.
A lender
will analyze your income to
determine your ability to repay
the loan. A general rule of
thumb to calculate how much loan
payment you can handle is to
figure 25-33 percent of your
gross, pre-tax monthly income.
The interest
rate and the principle amount of
the mortgage will determine the
amount of your monthly payments.
The higher the interest rate,
the higher the monthly payments.
The length of most real estate
loans is generally 15 or 30
years. Loans fall into two basic
categories: (1) those that have
fixed interest rates and
payments; and (2) those with
interest rates and payments that
vary over time.
A Fixed
Rate Mortgage provides a
known monthly payment that will
remain the same throughout the
life of the loan. This means
housing costs will never vary
and will be easy on the budget.
The interest rates on these
loans are usually a little bit
higher than on adjustable loans
since the lender is establishing
a set interest for a number of
years.
Adjustable
Rate Mortgage (ARM) loans
generally give the benefit of
low initial interest rates and a
corresponding lower monthly
payment at the beginning of the
loan term. The rates increase
(or may even decrease) as the
loan provides for periodic
changes in interest rates. An
important point to look for is
the presence or absence of
interest rate "caps."
Life-of-the-loan caps place a
ceiling on how high the rate can
go over the term of the loan,
often five to six percentage
points above the original rate.
They are a guarantee from the
lender that you will not be
required to pay more than the
agreed-upon maximum interest
rate. Annual caps protect you
from extreme jumps in the
interest rate in any given year
and are usually in the one to
two percent range.
Shop around
for your loan. Don't be afraid
to ask questions and to compare
one loan to another. Since you
will be living with it for many
years, make sure to get the one
best suited to fit your
financial circumstances.
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