Having moved in the last year, I’ve heard my parents talk a lot about mortgages. I’ve learned a lot from what I’ve heard from them, but I’ve also done a fair bit of research on mortgages myself. What have I learned? Quite a bit actually. Some may wonder, why do you care about mortgages – you’re too young. Well, knowledge is power, right? Who said starting younger is a bad thing?
Alright, so a mortgage that is suited according to ones needs can usually save thousands of dollars. On the other hand, if a mortgaged is not suited according to the individual, they may find themselves in a big mess, financially speaking. With so many types of mortgages, it’s important to know the basics of mortgages prior to picking one for you and your family.
For starters, you need to know the different mortgage options available to you. Depending on whether you have good credit, bad credit, or no credit, the options available to you will vary.
Good Credit
If you have good credit, a fixed rate mortgage is the ideal choice for you. As the name states, a fixed rate mortgage has the same interest rate for the entirety of the loan. This means the monthly payments will remain the same. An Adjustable Rate Mortgage (ARM) is also a good option. With an ARM, you can choose a 1, 5, or 10 year term. The rate is still fixed, but only for a specific time period. After this time period (1, 5, or 10 years) the rate will become a variable. With a variable rate, the monthly payments may be higher or lower, but that depends on what the interest rate is at the time being. With these rates, there are generally not huge increases or decreases — you won’t be surprised by any of the changes. On the other hand, with a 30 year loan, the interest rate may be a lot more or less near the end, than it was when it begun.
No Credit, Bad Credit
Needless to say, if you have bad credit, or no credit at all, the interest rate on your mortgage is going to be higher. In short, the majority of things said above (good credit) apply here. The only major difference is that your interest rate will be higher.
Components
With mortgages, there are two components that are quite major.vThese two major components include the interest rate and the down payment. If you are an individual who is pretty active from an investing stand point (stocks, homes, etc..) you should not put a huge down payment. The less you put, the better. Now, if your credit score is good, you can shoot to get a 100% mortgage. With this type of mortgage, the interest is usually more, but borrowing costs less (down payment). Shortly said, the amount they will pay to borrow will not be as much as they will gain from their investment.
If you are not a big investor, mortgages are good tools for investing. In my opinion, paying off a mortgage with a 7% to 8% interest rate is better than a savings account with a 3% interest rate.
With mortgages, everything can be negotiated. You want to negotiate for a lower down payment and interest rate (obviously). The more down payment you put, the lower your interest rate is going to be. If you do not know what you are doing, a mortgage consultant is probably your best bet.
Alright, I realize what I’ve said here is surely not new to 99% of my readers, but through writing posts like these, I try to expand my own knowledge (and hopefully yours in a sense too). Majority of readers probably have firsthand experience with mortgages, while I do not. It would be fair to say you’re one step ahead of me – but I’ll catch up! 
{ 4 comments… read them below or add one }
Me and my wife are actually in the process of buying a house right now. Just glad we’ve got a good friend who happens to be a mortgage broker
Too many bits and pieces involved for me. I just want nice house!
My wife and I are also in the process of buying a house. I have excellent credit, and chose a 5/5 ARM over the 30 year mortgage. Why? Well, with the 5/5 ARM, I only needed 10% down to avoid PMI, the closing costs were only $695, and the rate was about a half percent lower.
The 30 year fixed that the bank was offering needed 20% down to avoid PMI and closing costs were over $2000.
If you think about it, PMI is like flushing a $50 bill down the toilet every month. Do what you can to avoid it!
Jeff,
For your situation, going with the 5/5 ARM was definitely a good choice (based on my little knowledge of mortages
).
You clearly saved a lot of money through not going with the 30 year mortgage — some big numbers!
I do agree with you on your last point. I obviously won’t be buying a house anytime soon, but when time comes, I’ll do my best to avoid PMI. I’d rather keep those $50′s in my pocket
Thanks for dropping by!
Haha! That is great — having a friend that’s a mortgage broker. Can’t get much better than that.
I agree — way too much involved. Sadly though, it’s a party of life