A home is arguably the most expensive investment that most Americans will purchase in their lifetime. Mortgages are common for anyone who cannot afford the full price of the home with their independent financials. Although owning a home is associated with the “American Dream”, it is important to get the right loan and price before jumping into the real estate market. A bad home loan can cost you thousands and could even force you into bankruptcy.
Adjustable Interest Rate
Adjustable rate mortgages or ARM is a type of home mortgage that starts with an introductory interest rate, which is typically lower than fixed rates. However, the interests’ rates are subject to change depending on the financial markets. In the case of a poor economy, interest rates will remain low, but in the case of a good economy, rates skyrocket. If it comes down to purchasing a house with an adjustable rate mortgage or waiting to be approved for a fixed rate mortgage, it is in your best interest to wait.
Know Your Credit Score
According to the U.S. General Services Administration, the higher your credit scores the better interest rates you will receive. Credit scores range from 300 to 850, with 300 representing a very bad score and 850 representing a perfect score. Although a score of 850 eludes many Americans, a score of 700 or above is considered excellent and will almost guarantee good interest rates.
Hard to Understand Terminology
Before signing any home loan, be sure you understand all of the terminology. Even as someone who has studied economics in college, I rarely understand all the terminology in a loan. If you need to, hire a lawyer to review the terms before signing the papers.
Borrowing Against Your Mortgage
Some home loans allow you to borrow against your previous payments in order to receive money for immediate bills. Initial payments on almost any loan, including a home loan, are mostly interest payments. By borrowing against this equity, it guarantees you pay more in interest payments. Because the payments can be extended to nearly 30-years, it is easy to fall victim to over borrowing, which can be detrimental for your finances.
Qualification and Interests Rates
In the case of subprime mortgages, lenders would lend money to almost anyone that had a stable source of income, and sell the mortgages in bulk to investors. The investors then assumed the risk of these investments. The problem is that lenders were allowing people who did not have good credit, or a high enough income, also known as risky mortgages or subprime, to purchase properties out of their price range. Consider only taking out a loan that is four to five times your annual salary, your salary at the time of the loan, not your projected future salary. If you make $50,000/year and you are qualified for a $400,000 loan, be cautious of accepting the full amount because payments may be more than you can afford comfortably.
Personal experience as an economist