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.
How many points? Known as a “purchase point†or “discount points,†this up-front fee is equal to 1% of the mortgage amount. So, say you have a $200,000 mortgage; one point would equal $2,000. Purchase points can help reduce the interest rate over the life of the loan, according to online lender Quicken Loans, but it can also mean more when it comes to forking up your down payment. “If a lender says ‘we’re not going to
charge you any points but charge you an origination fee — it’s the same fee,†Charles says, so beware. For more information on purchase points and to decide of buying points is right for you, check out Quicken’s guide to purchase points.Don’t rely on others. Too often we rely on “experts†i.e. lawyers, real estate agents, and those with more “experience†to dictate what is in our best interest. But how much should we trust their expertise, especially when they have a stake in the matter? While
these experts can add insight and give direction, it’s up to consumers to discern — given all available information — what is the best decision. During a business reporting internship in college, a former editor once told me, “When you’re going to sign your mortgage, ask everyone to leave for a few hours and go over the document by yourself. Highlight anything that doesn’t make sense to you and ask the lender about it before you sign.†The Internet gives consumers unparallel access to information. If possible, research terms and information and always go armed with questions.“Loan officers have a vested interest in that deal,” Charles cautions. “A lawyer can’t really explain all the detail of the mortgage to the client.†The real estate agent also has a vested interest in the deal getting done. Heck, I make sure to exercise due diligence on every blog and article I write, but it’s still up to you to do your own research.
For more information on home loans check out:
Bankrate’s Mortgage Points Calculator
Homeowners Urged to Refinance While Rates are Low
Lending Tree’s ARM Calculator
Renita Burns is the editorial assistant at BlackEnterprise.com.