It's safe to say the American Dream usually involves a white picket fence, at least in the proverbial sense. Even as young children, we dream of a day where we will have our own home and a family to fill our adult space with. We spend our young adult years developing the tastes, ideals, and career paths that will bring us to our elusive future home.
Here you are, at the point where all of those dreams and hard work have led you—and you are absolutely convinced that the banker is speaking a foreign language as she directs your finances to help you determine mortgage options.
You are not alone. Today you can breathe easier, because we're going to take the first steps in demystifying mortgages.
PART ONE: Preparing Yourself To Get A Mortgage
So you're ready to step up your adult game and pursue the triumphs and tribulations of being a homeowner. Congratulations! Before we begin the celebrations, let's make sure you're properly prepared before you buy your home.
Credit Cards
Let's begin with your situation with the plastic that hangs out in your wallet—or at the checkout line. Begin your home buying process by thoroughly looking into your credit history and state of your credit cards. You don't want to close too many credit cards, because doing so could hurt your credit more than it helps. You do want to make sure that none of your cards have an interest rate that is more than twice the prime rate, which is currently at 6 percent.
Organize Your Finances
No, seriously, sit down and get your finances 110 percent organized. When you go to meet with your lender, you will need to be fully aware of your financial situation and be able to provide the documents they'll need. The documents you'll need to bring will include copies of your income tax returns, W-2 wage statements, paycheck stubs, bank and investment account statements, divorce decrees and child support documents, and recent credit card statements. For bonus points (read: you really should do this), craft a budget for yourself before meeting with your lender. Be realistic about your financial situation and what you can afford to spend on your mortgage.
Understanding PITI
Also known as Principal, Interest, Taxes, & Insurance, this helpful acronym is made up of the key components that will be going into your mortgage. Your principal is the part of the payment that is paying back the initial money you borrowed. Your interest is the cost you pay for borrowing. Your taxes will typically consist of one-twelfth of your annual property tax, which will be placed in an escrow account (a fancy word for money-in-waiting). Your insurance will be split up and incorporated into your monthly payments that will be lumped into your mortgage.
PART TWO: Types of Mortgages
Now that we've gone over the basics of preparing to get a mortgage, it is time to get down to business on getting the actual mortgage. With the abundance of options out there, we need to explain the popular types. When you meet with your banker next, it might not sound like another language this time!
Fixed-Rate Mortgage
With a fixed-rate mortgage, you can count on your interest and your monthly combination of interest and principal to stay the same throughout the duration of your loan. This type of mortgage is the most popular, as it offers the most stability. As interest rates fluctuate, you do not have to fear when it spikes and your loan runs out. The downside to this type of mortgage is that when interest rates decrease, you will need to refinance to lower your rate. This type of mortgage is best for those who plan on living in the same home for seven or more years and prefer stability in their finances.
Fixed-Period Adjustable-Rate Mortgage (ARM)
Another popular type of loan is the Adjustable-Rate Mortgage. ARMs have a fixed interest rate period (typically three, five, seven, or 10 years), and then are subject to having an adjustable interest rate the duration of the loan. These types of loans are ideal for those who do not plan to be in their home following the fixed rate period, or who believe that the interest rates will be lower than when they signed up for their loan.
Finally, every bank offers a complex suite of mortgage products; the two noted above are just the beginning. Be sure to visit your personal banker, retirement advisor, or attorney to find out which product is right for you in your unique financial circumstance.
Demystifying mortgages may seem daunting and filled with intimidating jargon, but it can easily be broken down into palatable bites. Dealing with lenders can be confusing, but don't let it get to you. Take it one step at a time—and next thing you know, you'll be cozy, settled, and totally in control of your finances in your new home.
Written by the people at MyRetirementPlan™, retirement planning advice at an affordable cost.
