Home Loans
A home is generally the most significant purchase a middle-class person makes. Because homes cost so much in relation to our incomes, it is generally necessary to get a loan, or mortgage, by which we repay the price over an extended period of time, generally 30 years. Although the 30-year fixed-rate mortgage was once the standard in the real estate industry, over the past few decades a number of other types of loans have come into existence. Each of these have their advantages and their risks, and you will want to take them into account when deciding what type of loan to get.
It is absolutely essential to know how much home you can afford, and not commit yourself to paying more than your monthly budget can handle. In the first several years of the 21st century, many people let themselves be talked into buying more home than they could afford, never thinking to question the real estate agents and bank officers who reassured them that regular raises and judicious job changes would allow their income to grow in pace with the upticks of their mortgages. When the hoped-for bigger paychecks failed to materialize to cover monthly house payments that suddenly jumped as a result of interest-only loans going to principal-and-interest, at times when they were already squeezed by skyrocketing gas prices, many people simply couldn't make the money stretch to cover all the bills. When they defaulted on their mortgages, the foreclosures began and the entire system began to unravel.
Even a decade or two ago, banks could be relied upon to take a close look at your finances and make sure that you would actually be able to repay the loan. But changes in lending laws reduced the bank's risk so that far too many loan officers have become far more concerned about maximizing the bank's short-term profitability, even if it means pushing people into loans on which they are doomed to default in the long run. One trick is to not really make it clear what the monthly payment will be over time on adjustable-rate mortgages. If you have questions, you can look up a mortgage calculator online and plug in the figures. If you're not comfortable with the numbers you're getting, don't lull yourself with wishful thinking. Walk away from that house and that mortgage, and save yourself a lot of grief.
Another thing you need to look closely at is whether you have the option of making early payments or paying the loan off early. Some loans have prepayment penalties, but others leave the option open. If you are able to make extra payments, especially at the beginning of the loan, you can cut years off the life of the loan and significantly reduce the amount of interest you will pay. However, like anything, the early payoff option is not without risks. If you do end up defaulting (for instance, if you have a sudden reversal of fortunes such as job loss in a down market and can't sell the home), it could make it difficult for you to get out easily.
The key thing to remember in getting a mortgage is to know what you're doing before you get into it. Don't be afraid to ask questions, including the hard questions that put loan officers on the spot. Remember, it's your financial future on the line, and saving their face won't help you if you get in over your head with an underwater mortgage.
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