Owning a Home and Types of Mortgages
Buying and owning your home is part of the American dream. Although the dream itself has since changed, the home still remains the main focal point. Today owning a home doesn’t necessarily mean a house. People now buy duplexes, cooperative apartments, and condominiums. For some families it could take up to a couple of generations before it’s able to have the capabilities of buying a home. To many people it means a certain achievement that only comes after years of hard work
. It is a life altering decision and one of the most important someone can make in their lifetime. The reasons behind the actual purchase could vary. Before anything is done, people must understand that it’s an extraneous process and it is a long term project
The first step to buying your home is assessing your financial situation. A person must evaluate how much exactly they can afford and borrow. Most people hire a real estate agent to find a home. A real estate agent can help in finding different homes that suit the person’s needs. At the Department of Housing and Urban Development’s website, “You'll want to start searching for a broker as soon as you decide to buy a home. Talk to several and find someone you think you'll be comfortable working closely with”(1) Having a wide range
of options is always helpful. An agent can also help in negotiating the price, and showing what the potential buyer needs after finding a home. A buyer might also need the services of a lawyer, a loan officer, insurance agents, and an accountant. In all purchasing your own home is a daunting task if you plan on doing it alone.
Finding a mortgage can be just as difficult as the home itself. There are more mortgages than there are possible homes. There are many factors that determine the amount of the mortgage and the interest on it. Credit bureaus such as Equifax, TransUnion, and Experian determine if the person has enough credit for a home loan. An acceptable credit score ranges from 620 and up for a mortgage. This is a very important facet because a person’s score can change the rate of interest. Other important factors that decide interest rate are the types of documents presented to the mortgage lenders. A person may have good credit, but may not be able to provide sufficient evidence of enough income. Applicants in this situation may have to enroll in programs such as NINA, (no income, no assets). NINA will help the person get the loan, but at a higher rate.
The amount of the down payment for a home eventually decides the type of mortgage a person will get. The larger the down payment is, the easier it is to get a mortgage. If the buyer cannot put down at least 20% of the cost, he or she usually will have to get Private Mortgage Insurance. This of course protects the lender from possible losses. There are other options however if a person cannot afford the 20% down payment or obtain the PMI, which increases the monthly payment substantially. Banks have created programs that finance up to 100% value of the property and divide it into two loans, the first for 80% and the second for 20%. This way the borrower would not have to get the PMI.
Payments on a mortgage can range from 15 to 30 years. Lately there have been programs that even go up to 40 years. The ‘conventional’ mortgage usually covers that time span at a fixed interest rate. These types of monthly payments allow amortization of the loan. A person can exceed payment on a mortgage, in order to shorten the length of the loan. This eventually works out for the borrower, in he or she will pay less interest in the long run.
The fact that there are many types of mortgages is beneficial to the public. There are many people looking for homes that are in different financial situations. For a well off family, a balloon mortgage will suit them best. If a person has the financial resources they can get a mortgage where they pay a fixed monthly price, then a large final payment. This means that the borrower will have paid off the loan much quicker than a conventional loan.
Another mortgage similar to the balloon mortgage in that it allows the borrower to pay off the loan faster is a growing equity mortgage. It allows the home owner to increase his monthly payments. Such a mortgage would help reduce a 30 year loan to a 15 year loan. If the owner can afford the increased payments, this again would greatly reduce the total interest rate paid. Other people, such as elderly couples, prefer a loan that is relative to the equity of the home, thus providing them a tax-free income, which is paid off when the home is sold. This type of mortgage is called a Reverse Mortgage. According to Fannie Mae’s official website, “ You and any of your co-borrowers, must be at least 62 years old and either own your home free and clear, or have a relatively low remaining mortgage balance and occupy the property as your principal residence.” (1) It is mainly used for people that have high equity on their homes and need quick cash. If a person can’t afford a typical market loan they are enticed in getting a shared appreciation mortgage. This allows the borrower to pay the loan at a lesser rate and at a lower monthly payment. The draw back is that when the home is sold, the lender will get anywhere from 30 to 50% of the selling price. This is pretty steep price to pay for the home owner.
Benefits of buying a home are many. People take a lot of pride in being able to call the place where they live, their own. Buying a home is the major step to financial stability. Owners have the opportunity to be a part of the community and achieve a feeling of belonging. In participating in the community the owner has more possibility to maintain his or her home and help with the neighborhood’s economy. In being the master of your dwelling you have the liberty to redesign your own home. That is a huge difference from renting in which a person is subject to the landlords rules and regulations. Many of the modifications to the home can increase the value of the property and at the same time improve quality of life.
Owning a home means the person is in charge of what they pay, while renters have to worry about rent increases. Also the owner will be able to have tax advantages that are not available to people who rent. The full interest on a mortgage can be deducible on taxes up to a 100%. With time, monthly payments of the mortgage will cancel the main balance of the loan and it will increase the value of the property. Having done this, owners can now request other loans to pay for other expenses, such as college for their kids, new cars, or a vacation.
List of Works Cited
Mae Fannie. The Fannie Mae Website. 2005. 11.May.2005
HUD. Department of Housing and Urban Development (HUD). 11. May 2005
11.May 2005. http://www.hud.gov/buying/index.cfm