Cutting Edge: Four Tips for Understanding A Mortgage

Using due diligence can help you avoid pitfalls

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Despite the housing crisis that helped submerge the nation leagues under troubled financial waters, homeownership is still essential to building wealth. As with any trial, there are lessons to be learned.

One of which: how to read a mortgage. Muddled in jargon, many homeowners, like with other contracts, sign and hope for the best. But with the livelihood of your family at stake, a little due diligence could mean the difference between ending up on the street and living peacefully in your humble abode. If you’re looking to buy a home, here are key terms and tips you need to understand before making the big buy.

Beware of the ARM. Skyrocketing monthly mortgage payments brought about by adjustable-rate mortgages left many homeowners homeless or at-risk of foreclosure.

Up until 2007, many perspective homeowners were told they’d be able to refinance their homes later for lower interest rates as the property value on their home was bound to rise, says Kirk Charles, mortgage consultant (The Mortgage Confidant) and author of The Real Deal: How to Get a Mortgage During & After the Subprime Crisis (CreateSpace, $16.95). With interest rates shooting upwards of 18%, once manageable payments can soon become overwhelming with an adjustable rate mortgage. Experts caution against ARMs pushing instead for fixed rate mortgages.

Don’t compare apples and oranges. What will you end up paying over the life of the mortgage? The annual percentage rate (APR) and the interest rate are your guides. But they should not be given the same weight when comparing.

“APR calculates all of the fees that go into processing a mortgage,” Charles says. APR includes upfront fees and other costs of the loan, and calculates them as a yearly percentage of the loan amount, according to GetSmart, an online consumer resource center.  The interest rate however, is a percentage of the loan amount the bank is charging you to borrow the money. “You don’t want the APR to be too much higher than the interest rate,” Charles adds. You also don’t want to compare the APR on one mortgage to the interest rate on another offer.

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