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Home Mortgage Basics provides you with the information required to choose the right mortgage company, avoid the traps and save money on your mortgage. Find the right mortgage company. Learn to compare points, interest rate, term, adjustable, fixed and other mortgage terminology.

Home Mortgage Basics

The Home Mortgage is the largest financial commitment most people make, yet, most people spend less time researching their mortgage than they do their vacation.  They don't even know the basics.  I hear, as of 2004, the average price of a home in California is over $ 400,000.  If you put about 12% down ($ 50,000), on a 30 year,  fixed mortgage, you would pay over $ 800,000 to pay for this home.  If you're spending 80% of a million dollars, doesn't it make sense to spend a few hours to get the best mortgage deal you can?  That's what this page is about.  The popular books can help you manage the Basics of Home Mortgage.  We'll discuss the types of mortgage available, advantages and disadvantages of each, how to work the points in your favor and how to get the best mortgage deal.  We'll also discuss things and people to avoid like the plague.  So, let's get started!

Types of Mortgage:

15 or 30 Year Mortgage:  If you have plenty of extra money, you can save on interest by getting a 15 year term.  Many companies offer 15 year mortgages at a discount of 1/4 to 1/2 % in interest.  Lets say you borrowed $ 400,000:  At 6% for a 30 year term, you would pay $ 2,398.20 per month, or $ 863,352 total.  If you could get a 15 year term at 5.5 %, your monthly payment would be higher ($ 3,268.33) but the total amount you will pay is $ 588,299.  In other words, if you can make the higher monthly payments, you can save $ 275,000 and change.  If you'd like to know what your monthly payment will be, you can use our Free Mortgage Payment Calculator

Fixed or Adjustable Rate Mortgage:  A Fixed Rate Mortgage charges the same interest rate throughout the term of the loan, regardless of what the economy is doing.  An Adjustable Rate Mortgage (ARM) can go up and down depending the economy.  For the last couple years, we have had the lowest mortgage rates in the last 25-40 years.  Knowing this, do you think, over the next 15-30 years, mortgage rates will go up or down?  History tells us rates are far more likely to go up.  That's why many companies are pushing the ARMs at lower initial rates than the fixed mortgages...they can make more money when the rates go up.  If you believe rates will go down over the term of the loan, it's better to use an ARM.  If you believe the rates will go up, get a fixed mortgage.

Interest Only Mortgage: This is a new neighbor on the block, and very dangerous.  Because mortgage payments are so high, many companies are offering interest only mortgages so people can get more house than they can really afford.  Remember the payment for the $ 400k, 6%, 30 year fixed mortgage above?  If this were an interest only mortgage, your minimum payment would be $ 398 less.  Here's the problem:  If you only make interest payments, at the end of the loan, you still owe $ 400k.  All it does is put off the eventual payment and charge more interest in the process.  If you can only afford $ 2,000 per month, it's far better to get a house that costs 50,000 less.

Home Equity Loan:  This is for emergencies only.  You actually move backwards financially when you get one of these.  It's called a second mortgage because you still have the first one.  The only reason I can see to get one is if you're on the verge of bankruptcy.  If you are, you won't be able to make the payments anyway, unless you use it to consolidate all your other debt.  Even then, it doesn't save money, just reduces bills.  Take a look at Tips on Budgeting and Debt Free Living Help before going here, no matter how attractive they make it seem.

Home Equity Line Of Credit:  Simply put, this is a credit card using your home as collateral.  You can charge, pay off and re-charge the total amount of the loan as many times as you wish during the term...but at the must pay it off on time or lose your home.  This is even scarier than the two above.  If your spending need is more than a couple normal credit cards can handle, see Compulsive Shopping Addiction.  There are very limited situations where this type of loan could be useful to help the cash flow of a cyclical business, but it is not for the average homeowner.

Home Refinance Mortgage:  Many companies are advertising how you can refinance and 'cash out' your equity to spend on vacations, more stuff, etc.  If you take the value of your home and subtract what you currently owe on it, what's left is called equity.  That's the part of your home you actually own.  When you 'cash out' equity, you reduce the amount you actually own and increase the amount you must pay each month.  Does that make sense to you?  Refinancing makes sense only when the new loan can reduce your interest rate by 1.5% and only if you refinance the same amount as the payoff balance without 'cashing out' any equity.

Reverse Home Mortgage:  If you're 62 or older, have significant equity in your home and have a cash flow problem, you can get a reverse mortgage for tax-free lump sum or monthly income.  This is a very expensive loan, but if you need the money and have it in your home, this may be your solution.  For more information, see Reverse Home Mortgage Info.

Continued on Home Mortgage Basics-2

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