Benjamin Harris; Broker, C.S.S.

Posts Tagged ‘Buyers’

Homeowner’s insurance is mandatory. When you purchase a home, your mortgage lender won’t allow you to close the purchase until you’ve demonstrated that you have proper homeowners insurance. Lenders usually insist that you pay the first year’s premium on said insurance policy at the time of the closing.

When you buy a home, you should want to protect your investment in the property (as well as cover the not-so-inconsequential cost of replacing your personal property, if it is ever damaged or stolen). Your clothing, furniture, kitchen appliances, and other valuables can cost a lot to replace.

You should shop for insurance ahead of time. Get quotes on insuring properties as you evaluate them or ask current owners what they pay for their coverage. If you overlook insurance costs until after you’ve agreed to buy a property, you could be in for a rude awakening.

When shopping for insurance, explain to the insurance agent what type and cost of properties you are looking at and where they are (zip codes). They should be able to give you a ballpark monthly cost estimate for insurance. Calling insurance agents now will also enable you to begin to evaluate which insurers offer the service and coverage you desire when the time comes to actually buy your home.

To help minimize the cost, you should buy the most comprehensive coverage that you can and take the highest deductible that you can afford.

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Like some other financial and investment products, many different mortgage options are available for your choosing. Two fundamentally different types of mortgages exist, and they differ in terms of how their interest rate is determined: fixed-rate mortgages and adjustable-rate mortgages.

Distinguishing fixed from adjustables

Before adjustable-rate mortgages came into being, only fixed-rate mortgages existed. Usually issued for 15 or 30-year periods, fixed-rate mortgages have interest rates that are fixed during the entire life of the loan.

With a fixed-rate mortgage, your monthly mortgage payment amount does not change. No surprises, no uncertainty.

Adjustable-rate mortgages (ARMs for short) have an interest rate that varies. The interest rate on an ARM typically adjusts every six to twelve months, but it may change as frequently as every month.

The interest rate on an ARM is primarily determined by what’s happening overall to interest rates. When interest rates are generally on the rise, odds are that your ARM will experience increasing rates, thus increasing the size of your mortgage payment. Conversely, when interest rates fall, ARM interest rates and payments generally fall.

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Mortgages undoubtedly constitute the biggest component of the total cost of owning a home. A mortgage is nothing more than a loan you take out to buy a home. A mortgage allows you to purchase a $150,000 home even though you yourself have far less money than that to put towards the purchase. With few exceptions, mortgage loans in the U.S. are typically repaid over a 15- or 30-year time span. Almost all mortgages require monthly payments.

How a mortgage works

Suppose that you are purchasing a $150,000 home and that you have diligently saved a 20 percent ($30,000 in this example) down payment. Thus, you are in the market for a $120,000 mortgage loan.

You sit down with a mortgage lender who asks you to complete a volume of paperwork. There are literally hundreds of mortgage permutations and options.

Imagine, for a moment, a simple world where the mortgage lender offers you only two mortgage options: a 15-year fixed-rate mortgage and a 30-year fixed-rate mortgage (fixed-rate simply means that the interest rate on the loan stays fixed and level over the life of the loan). Here’s what your monthly payment would be under each mortgage option:

$120,000, 15-year mortgage @ 7.00 percent = $1,079 per month

$120,000, 30-year mortgage @ 7.25 percent = $ 819 per month

The interest rate is typically a little bit lower on a 15-year mortgage versus a 30-year mortgage because shorter-term loans are a little less risky for lenders. Note how much higher the monthly payment is on the 15-year mortgage than it is on the 30-year mortgage. Your payments must be higher for the 15-year mortgage because you’re paying off the same size loan 15 years faster.

Total cost of a loan

But don’t let the higher monthly payments on the 15-year loan cause you to forget that, at the end of 15 years, your mortgage payments disappear; whereas, with the 30-year mortgage, you still have 15 more years worth of monthly payments to go. So, although you do have a higher required monthly payment with the 15-year mortgage, check out the difference in the total payments and interest on the two mortgage options:

A 15-year mortgage equals $194,147 in total payments and $74,147 in total interest

A 30-year mortgage equals $294,700 in total payments and $174,700 in total interest

It shouldn’t come as a great surprise that (with a decent-sized mortgage loan like this one) you end up paying more additional interest. The 30-year loan is not necessarily inferior, for example, if its lower payments better allow you to accomplish other important financial goals, such as saving in a tax-deductible retirement account.

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Let’s start with the basics. What is a mortgage? A mortgage is nothing more than a loan that you obtain to close the gap between the cash you have for a down payment and the purchase price of the home that you’re buying. Homes in your area may cost $70,000, $170,000, or $770,000. No matter — most people don’t have that kind of spare cash.

Mortgages typically require monthly payments to repay your debt. The mortgage payments are comprised of interest, which is what the lender charges for use of the money you borrowed, and principal, which is repayment of the original amount borrowed.

Learning how to select a mortgage to meet your needs ensures that you’ll be a happy homeowner for years to come. You also need to understand how to get a good deal when shopping around for a mortgage because your mortgage is typically the biggest monthly expense of homeownership (and perhaps of your entire household budget). Paying more in total interest charges over the life of your mortgage than you originally paid for your humble abode itself is not unusual.

Suppose that you borrow $144,000 (and contribute $36,000 from your savings as the down payment) for the purchase of your $180,000 dream palace. If you borrow that $144,000 with a 30-year fixed-rate mortgage at 7 percent, you end up paying a whopping $200,892 in interest charges alone over the life of your loan. That $200,892 is not only a great deal of interest — it’s also more than the purchase price of the home or the loan amount you originally borrowed!

So that you don’t spend any more than you need to on your mortgage, and so that you get the mortgage that best meets your needs, the time has come to get on with the task of understanding the mortgage options out there.

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