There are tons of programs that let you buy with virtually no money down or cash up front. These are popular because buyers can afford bigger, better homes. But you must proceed with caution. Naturally, you pay more over the life of your mortgage the more you finance.
You also need to plan for the worst when making such a big commitment. If something happens where you can't pay your mortgage two months after closing, will you have any equity in your new home to either borrow against or cushion the blow of having to sell quickly? You won't if you put nothing down.
Finally, the more you finance the more susceptible you are to fluctuating property values. Real estate values will go up over time almost without exception. But in the short term, you're better protected the more of a down payment you can comfortably make.
Adjustable Rate Mortgages and Interest-Only Loans
Adjustable rate mortgages (ARMs) and interest-only loans are very popular today. They let you pay less now and more in one, two or three years (usually). Paying less now and more later is right for some buyers.
But this too has pitfalls. With an interest-only loan, you don't pay down your principal at first. It's cheaper, but your monthly payments are going to spike, often drastically, after the interest-only period is up. The same is true, if less dramatically so, with adjustable rate loans.
Be sure you can either afford to pay the adjusted monthly payment down the road, or that you'll be able to refinance your mortgage again before the payment spikes. Both scenarios involve uncertainty. You need to be comfortable with the level of risk and not just look at your initial monthly payment.
80/20 Mortgages
You may also consider something called an ?80/20? mortgage, actually two mortgages ? one for 80 percent of the contract price, and a second mortgage for the remaining 20 percent. You'll sometimes hear this referred to as a ?piggyback? loan. Buyers often favor these because they can avoid paying a premium for private mortgage insurance (PMI) and don't need to make a down payment.
As with other popular mortgages, you should consider the drawbacks, too. You'll likely pay two sets of closing costs, though that may be less than a down payment plus PMI. And lenders are often very creative when it comes to 80/20 loans, especially the smaller, second one. It will likely have a much higher interest rate, and may reach maturity ? that is, you may be responsible for paying the full balance ? after only a short time.
Again, be sure you can either afford your future liability or will be able to refinance.
Banks are in the main, pretty stable financial institutions. Banks deal with money, and they profit from activities such as offering mortgages to private individuals, and offering banking for corporations. As such as most banks offer free private banking to customers, there needs a way for the bank to make money. With mortgages the bank makes on average 4 times the amount they put in! As you can imagine, mortgages are profitable ventures for the bank. However, like all things that can earn money, there is an element of risk.
The risk that banks put up is always based on calculated risks, so banks may not be the best way to get a mortgage, especially if you have bad credit. To vent this problem and allow more people to get a mortgage, the bank charges a very high rate of interest. This is to the detriment of most people, as you are paying high fees, and any kind of negative on your credit record, could mean a bank will reject your application. The rejection is a bad aspect as it gets added to your credit score, and a few of these could stop you from getting a mortgage.
In came mortgage financing companies. These companies offering mortgages to private and business clients enabled more people to get a home mortgage. Unfortunately, these financing companies which dealt mainly with private clients that had existing debt problems and bad credit, would give a mortgage to these individuals, but it would cost more than a bank would charge in interest! As you can imagine, this does not get people out of debt, it gets them into bigger debt.
There had to be another way, especially for all the people that have mainly good credit scores. So the mortgage financing companies started adding more packages which benefited most of the people. For anyone performing the go ahead of giving you a mortgage, they want safe customers. The mortgage financing companies want customers who will pay back the mortgage, and earn them a profit. In most cases this is what happens.
The mortgage companies started offering mortgage packages which benefited people with good credit ratings. They started offering mortgage packages which had much lower interest rates than banks could offer. This started to get the interest of people looking for a mortgage, who were willing to put in the effort to research the various mortgage companies.
Going with a bank to get a mortgage can be an easy process. If you have been banking with the bank since you was a child, and have been in good standing with the bank, a mortgage with the bank is often streamlined and easy to do. However, being this kind of person could see you paying 10s of thousands of dollars extra in interest. Imagine working an entire 12 months or even a few years extra, in all that time, just to pay what you could have saved with an extra week of research.
There needs to be some caution however with both mortgage lenders, either bank or a dedicated mortgage lender. They both can have clauses which could either be to your detriment or to your benefit. As always select a few packages and look more deeply into them before committing, and always use the aid of financial professionals, who have had experience of mortgages and the process of buying a home, and are there to help you get your dream home.
Both Eric Bramlett & Ben Needles are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.