Shopping for the Right Mortgage

Following this advice can help you find the loan that meets your needs

much my monthly payment would be,” he says. “I used mortgage calculators to find out information on the loan amount, taxes and how they fit in, and even calculated the amount that we would have to put into escrow.”

In general, when lenders look at how much a potential home buyer can afford, they take into account your debt-to-income ratio. Keep in mind, your monthly mortgage payment-including principal, interest, real estate taxes, and homeowners insurance-should not exceed 28% of your gross monthly income. For example, if you make $70,000 in gross income, your monthly housing expense should not exceed $1,633 a month. Otherwise, you may find it difficult to stay afloat financially, unless of course you have other income (i.e., alimony or business income) to cover any excess.

To calculate your housing expense, multiply your annual salary by .28, then divide by 12. The answer is your maximum housing expense. For Springs, her $35,000 salary as a child care program consultant helped her to afford a monthly mortgage payment of $714.

Aside from knowing what you can afford, you must educate yourself about the home ownership process in general. Organizations such as NeighborWorks America (www.nw.org),a national network of more than 240 community development and affordable housing organizations started by Congress, can walk you through the process of home ownership from start to finish. Such organizations can also work on your behalf to find lenders that are suitable for your financial situation.

WHICH LOAN IS RIGHT FOR YOU?
There are generally three categories of loan products: fixed-rate, adjustable rate, and hybrid. “About 20 years ago, you had very few options. You went to your local bank and hoped they would grant you a mortgage,” says Dolf de Roos, a real estate investor and author of Real Estate Riches: How to Become Rich Using Your Bankers Money (John Wiley & Sons Inc.; $16.95). “Today, there are hundreds of mortgage products on the market, so you have to be very judicious and know what you want because it’s so easy to buy the wrong thing.”

People most often choose traditional fixed-rate loans, which offer the stability of a fixed interest rate and fixed monthly payment over the life of the loan. “You really can’t go wrong with a fixed-rate loan,” says Greg McBride, senior financial analyst at Bankrate.com, but he cautions, “It may not be the optimal choice given your circumstances.” Therefore, it’s best to look at all of the options.

For prospective buyers looking for a little more flexibility, especially on the front end, consider an adjustable-rate mortgage, which provides the borrower with an introductory interest rate that adjusts at a later time according to market conditions. “The borrower bears a little more risk because of interest rate volatility, but in exchange, they get a lower initial interest rate,” says McBride, whose site offers a section called “Mortgage Basics,” to walk you step-by-step through the home buying process. “That rate, however, can adjust higher in the future.”

A hybrid loan is a combination of a fixed-rate and adjustable-rate loan.

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