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The 10 Commandments For Purchasing a Home – Part 1 |
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Thursday, 16 August 2007 |
By Kevin Martin
 Kevin Martin
For people who would prefer not to be a victim in the first
place I am presenting my "10 Commandments" for purchasing property. Please note that these commandments do NOT
cover everything you need to know about mortgages, nor will they make you an
expert. You are going to need to work
with your loan agent and ask a lot of questions. Also, I cannot guarantee that this
information will protect you from all "predatory lenders" or ensure that you
will not get a "bad" home loan. These
Commandments are simply starting points to help you evaluate home loans before
you make a decision.
1st Commandment: Thou
Shalt Compare Mortgages Rates
While this seems obvious, apparently many people choose not
to do it. Never sign up for any loan
without comparing loan rates.
A lower interest rate means a difference of thousands of
dollars over the life of your loan. Even
_ of 1% can make a difference. For
example, if you compare two 300,000 dollar, 30 year fixed loans, one with an
interest rate of 7% and another with an interest rate of 7.5%, the 7.5% loan
will cost you $101.73 per month more for a total cost of $36,000 over 30
years! (I used Bankrate.com's mortgage
calculator to get this information. You
can find mortgage calculators on line by searching for "mortgage
calculator". Enter the interest rate,
amount of mortgage and number of years).
Meet with multiple lenders to see who offers the best
deal. Almost all banks have a loan
officer on the premises. Sit down with
the loan officer and let him or her know that you are comparing rates and that
you will be meeting with a number of lenders and what they can do for you. Don't work with any lender who is upset by
competition or who tries to discourage you from comparing rates.
Also, although they have been maligned in the news, mortgage
brokers can be an excellent source for rate comparisons. Good mortgage brokers represent multiple
banks and are a good place to do a number of comparisons in one location. For example, the Rancho
Cucamonga office of World Financial Group has a mortgage broker that
represents Washington Mutual, Wachovia and other banks.
2nd Commandment: Thou
Shalt Understand Mortgage Rate vs. APR (Annual Percentage Rate)
The Mortgage Rate is interest that the lender charges you
for borrowing money to purchase a home.
This mortgage rate does not include the effect of any fees and charges
such as points, commissions, etc.
The Federal Truth in Lending Law requires mortgage companies
to disclose the Annual Percentage Rate (APR) of a loan. (see http://mortgage-x.com/library/apr.htm). The Annual Percentage Rate is a way of
finding out what fees may have been added to the home loan which will increase
its effective loan rate. Please note
that the Mortgage or Note rate does not usually include all fees or charges
(such as pre-payment penalties).
APR is a tool for comparing different rates. Let's say that you are speaking with two
lenders about a 30 year fixed rate loan with an interest rate of 7%. However, the first lender's loan has an APR
of 7.10% while the other has an APR of 7.25%.
You will want to ask the lender what fees or charges have increased the
APR.
3rd Commandment: Thou
Shalt Begin by Considering Fixed Interest Mortgages
The first step in considering a home loan is to find out
what is the prevailing interest rate for a 30 year fixed home loan. This is the standard home loan that has been
in existence for years and still works well for many home buyers. The key to a fixed rate loan is that your
monthly payment will not change even when interest rates change.
I am not saying that you should always get a fixed
rate. There may be good reasons for you
to consider an Adjustable Rate Mortgage, also known as an ARM. However, a fixed rate loan is the easiest to
understand and is a good place for new home owners to start when shopping for a
loan.
4th Commandment: Thou
Shalt Understand Thine Monthly Payment
Your monthly payment is made up of a number of components
including Principal, Interest, Taxes and Insurance. These factors are often abbreviated
PITI. For any loan, you need to make
sure that you ask the loan officer to explain what your total payment will be
including all of these factors.
Please note that while some lenders will automatically bill
you for insurance and taxes as part of the loan payment, others will not. You may have to make the payments on your
own. Also, if you do not make an initial
down payment of at least 20% of the overall loan value, you may be charged PMI
or Property Management Insurance which will increase you total monthly
payment. (The next article will discuss
PMI in more detail.)
5th Commandment: Thou
Shalt Not Purchase a Home Unless Thou Can Afford the Home
Again, this seems obvious, but people too often buy homes
they cannot really afford. Often, this
happens because lenders have loosened their financing guidelines. Here is a good rule of thumb for deciding if
you can purchase a home.
Mortgage experts that I have spoken to say that a homeowner
should usually only purchase a home if the monthly payment is less than 33% or
1/3 of their gross monthly salary. In
other words, your monthly gross paycheck should be three times larger than your
monthly home payment.
For example, if your total monthly payment (remember PITI
see the 4th Commandment) is $1,000, then your gross monthly (before taxes and
other deductions) paycheck has to be at least 3,000 dollars because ($1,000 X 3
= $3000).
Next week I will provide 5 additional commandments.
Kevin Martin is an entrepreneur who grew up in Riverside and who is
interested in discussing specific actions for improving the black
community. Comments can be sent to "
This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
". This account receives a great deal of spam
so be sure to include this article's title or blackvoicenews in your subject
line.
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