Understanding mortgages before buying or selling a home may be the most important step in the process. Mortgages can be confusing, but a little homework can help you make sound financial decisions.
A mortgage is a lien that a lender puts on your real estate, your house and land in order to secure the loan they are giving. he lender doesn't own the property, you do, but if the loan is not paid back according to the terms they can foreclose.
Knowing how much you can afford and how much you can borrow are two very different things. A lender may be willing to lend you more than you believe your lifestyle can afford. They aren't concerned with how a loan may affect the way you live. They are concerned with your ability to repay the loan and the value of the property that your buying. You're the only one who can determine how a certain payment may or may not affect your lifestyle.
Lenders will look at your income and potential income, your debt, savings and credit history. The value of the house and property and the interest rate they require before deciding on an loan amount. Ideally, it will be enough to cover the gap between your down payment and the price of the home you want.
There are lots of different types of mortgages to consider. If you intend to remain in the home for the next 5-10 years or more a fixed rate should best serve you where the payments remain the same regardless of market conditions. On the other hand if you plan on trading up or relocating in the foreseeable future you could benefit from some type of an ARM (adjustable rate) or hybrid ARM with a lower initial interest rate.
A lender may also allow you to pay points in order to buy down or lower the rate that your getting on your loan. If you don't plan on staying in the property longer than a few years you probably would not recoup that cost. Generally you don't want to pay more than 1 point which means your cost is 1% of the loan amount for whatever consideration the lender is offering. i.e. lower rate, bad credit, complex transaction.
If you have questions on what types of mortgages are currently available or just understanding the process please feel free to contact me.