Making Sense of Mortgages

Thinking about refinancing or taking out a new mortgage? Here are several factors to consider:

Be aware of your overall financial picture; do not consider your mortgage loan to be separate from your other finances. Your mortgage should be included in all of your financial planning. You should organize your expenses on paper and keep a tally of what you own, how much you are worth, and what your debts are. Analyze your credit history and make sure the information maintained by the credit agencies is accurate. Maintain a budget so you know how much money you have coming in and what your cash expenditures are. When you have done all of this you will have a good idea of how much mortgage you can afford; you can then determine how you are going to finance your new mortgage.

While it may seem to be the most important factor while you are shopping around, don’t assume that the lowest monthly mortgage payment is going to be the best loan for your situation. If your goal is to live in your home and pay off the mortgage don’t jump at the loan with the lowest monthly payment. The reason for this is the less you pay every month with a lower payment the less you are reducing the principle of your mortgage loan.

Beware interest only loans.

Interest only mortgage loans are very popular at the moment. This type of loan allows you to potentially qualify for more house than you can really afford. Most interest only loans come with adjustable interest rates mortgages; however, some can be found with fixed interest rate loans. Calling these loans “interest only” can be misleading to many homeowners. There is really no such thing as an interest only mortgage loan, because at some point you will have to pay off the principal balance as well. For example, the loan payment on a 6 percent interest rate, 30 year mortgage loan of $100,000 is around $600. Of that payment, $500 is paid in interest on the loan. If you spring for an interest only type of mortgage loan, you’ll be lowering your payment by a measly $100 per month; on top of that you’re not building equity in your home, you might as well be paying rent. The only equity gains in your home you may see with this type of loan is value appreciation in real estate prices. The risk you run there is the housing market could reverse and you would see the value and the equity in your home drop. What happens if you lose your job and are unable to make the payments? Selling your home with this type of debt could be a disaster in the making; you could find yourself easily owing more money than your home is worth.

Many mortgage experts warn that interest only mortgages are only intended for home owners planning to move before the loan principal becomes due, or for individuals who expect their incomes to rise sharply in time.

What are Option adjustable rate mortgage loans?

Similar to their interest only cousins, these mortgages, called option adjustable rate mortgage loans are becoming very popular in the marketplace. These loans like the interest only variety should come with a warning label. This mortgage loan gives homeowners the option to pay less interest than what is due on their mortgage by deferring that part of the payment and adding it on to original mortgage balance. The attraction here is a lower monthly payment. However, if you choose to do this you will owe more than your original mortgage loan. If you fall into this type of predatory trap you could wind up caught in a never-ending loop of mortgage payment increases as the interest due each month increases with the growing balance of your mortgage. Not to mention you’ll never pay your home off.

To learn more about your options when it comes to mortgage loans, sign up for our free book “Five Things You Need to Know When Refinancing a Mortgage.”