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Mortgage 101 - A Primer for First Time Buyers

Posted by  on May 13, 2010
 
When you're new to buying a home or making any large financial decision, it's best to learn as much as you can before you get started in the process. If you're looking to buy your first home, you might want to learn more about what mortgages are and how they can help you. Though in most cases, you will be able to get good reliable information from your realtor or lawyer, it never hurts to begin to learn about mortgages before you even shop for the home you want.

Getting Ready for the Mortgage Process

If you feel you are ready for the commitment of a home, you want to start looking at your financial health. Signing up for a mortgage is a big deal, so you need to make sure that you are ready. Before any lender will agree to give you money for this kind of arrangement, you will need to prove to them that you have good credit, can pay your bills on time, and are ready to begin to take on this huge financial responsibility. Start by checking out your credit report to see how low or how high your rating is. If you have good credit, you will simply need to keep it up, but if your credit rating is lower, you might not be able to get the lower interest rates that many others are able to. To help boost your credit rating, you will want to start paying down high credit card balances, as well as dispute any errors that you find on your credit report. This will need to be done well in advance of your actual loan process in order to show that you have a long history of good financial health.

Are You Financially Ready?

There's a great test to see if you would be able to take on the financial responsibility of owning a home — try it out. To do this, set up a separate savings or checking account into which you transfer the mortgage payment you would have to pay if you had a mortgage. Do this for six months to see how the rest of your life would have to change in order to make this payment. If you find you can do this easily, you are ready to buy a home, but if not, you might want to wait. (And the bonus is that you will have a large amount of money for the down payment as a result.)

Finding a Lender

There are hundreds and hundreds of lenders out there that are more than willing to set up a loan with you. You can find these lenders through your bank and through private lending companies as well. You might want to take advantage of the internet as well, with its wide range of options in terms of lending. Because there are so many lenders these days, buyers are actually at an advantage in terms of getting the best interest rate and payment options. Be sure to look into multiple lenders to see what they can offer you and then talk to each lender about the amount of money you want to borrow as a part of your plan.

Checking Interest Rates and Types of Loans

There are a number of loans that you can choose, all with their own interest rates and terms. The two most common loans are Fixed Rate Mortgages and ARM (Adjustable Rate Mortgages). As their names indicate, the fixed rate mortgages have an interest rate that will not fluctuate over the length of the loan. With the ARM, this rate will fluctuate. There are advantages to both loans in this way. With the fixed rate, if you happen to get into the loan during a low interest time period, you will get to take advantage of that interest rate for the rest of your loan, but likewise, if it's a high interest rate when you get in, you're stuck with that. If you choose an ARM, you can have lower interest rates for a while and then higher after another while — it just depends on the market.

To check the current interest rates, you can search online or simply check with the lenders that you are exploring for your mortgage.

Reading the Fine Print

With all of the fine print that is associated with a mortgage, it will help you to have some assistance in determining whether or not you've made the right choice of mortgage. Enlisting the help of a lawyer as well as of a financial planner can help you be sure that everything is working to your financial advantage.

Of course, asking as many questions as you can and making sure to read all of the fine print will also help you in your quest for your first home.

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