Curious About Home Mortgages

[Anonymous-0]

Lately I've been wondering what it'll take for me to buy a house. Instead of going to the bank and have them look down their noses at a 20 year old and get blown away by jargon, I was hoping you folks could explain things. I'd be looking at a FIXED interest rate of 6.9% or so. That's pretty much all I've got to go on. How is the interest compounded and paid off and all that? My dad told me it's a lot more complicated than a 3 year car loan. Right now I pay $500/mo. rent on a little country home, and I wonder what I can borrow for $500. Try not to discourage me too badly, my biggest goal in life is to own a home and a patch of grass.

 

[Midwest redneck]

I bought my first home when I was 23. it cost me $58k and I put down $10K, I worked my *ss off to save that money up.
1. Put down enough money so that you dont have to pay PMI. PMI is private mortgage insurance. that basically means that the bank doesnt trust you enough to loan you the money if you dont have enough equity to start with. PMI is a scam. Plain and simple.
2. get a 15 year or a 20 year mortgage loan.
3. DONT get a variable interest rate loan.
(too complicated to explain)
4. Basically you need to search the net for what is called an amortization schedule to see how a loan is paid for with principal and interest.
5. Remember that the bank or mortgage company is not your friend and that you need to do your homework. Banks are not in the business of helping people, only the bank executives and shareholders get rich off of your money.
(if you dont believe me then try to get a loan with no collateral)
Do your homework by reading up on how loans are paid back to banks and lending companies. read and educate yourself it is the best way to not let the banks make too much money off of you.

 

[Midwest redneck]

8 years ago I built my home. I needed money to finish the home, Carpeting, drywall, paint, toilets, etc. I asked the bank manager at my bank if I could get a loan to finish my home. He says "are you a licensed contractor" I say no just a guy with skills and brains building a house. He says, sorry we dont loan money to guys just building houses.
Get this---a month later after I was set up with a mortgage broker the same bank manager saw me in line waiting to cash my payck and he says to me "would you like a home equity loan" I looked at him and said are you serious he says "of course" I said well wait a minute I was loser 4 weeks ago and you wouldnt loan me a dime to finish my home, he looks at me in amazement and I said I guess you miss out buddy, I wanted to sock him right in the face.

 

[Anonymous-0]

Thanks for the reply. I forgot to add I'm a member of a small local credit union, so would things be a little different with them?

 

[Anonymous-0]

One more thing, I just got my credit report online, and it told me I rate 711 on a scale from 330 to 830. I guess that's not too bad for a young fella...is it?

 

[Mike (WA)]

I'll go along with Midwest Red except you should get a 30 year loan, especially this first one. You can always make it into a shorter term loan, just by making larger payments. But its important to have the flexibility. At 6.9%, payment of $500 per month will get you about $76,000. By way of comparison, $500 a month will only get you $56,000 on a 15 year loan. You will probably have to have at least 10% down in today's mortgage climate, but if you can put 20% down, you'll avoid PMI, which I agree is a campfire into which you throw money every month.

 

[NBAllen]

I've never had a car-loan, so I can't speak (by experience) to how they might compare.

1. Good on ya' to be looking at a fixed rate loan. That way you know what your monthly payment will be for the term of the loan.
2. You may need to be 21 to sign for a home loan, but I don't know for sure.
3. The typical home mortgage payment will consist of 4 parts - Interest, principle, and possibly mortgage insurance and escrow payments (the last two depend on the specific loan):

Interest is what you pay for the priviledge to use "their" money.
Principle is where you (slowly) return the initial amount you borrowed.
Mortgage insurance is an extra fee to "insure" against you failing to pay off the loan. If you can put 20% down (or take a 2nd mortgage for the difference between 80% of the loan value and your down-payment), the mortgage lender is not allowed to charge mortgage insurance
Escrow payments are where the mortgage company will collect ~1/12 of the homeowners insurance, property taxes, homeowners assn fees, etc. each month, then pay those bills as they come due.

4. Based on a quick calculation, for a $500/mo payment, you can probably borrow ~56,000 for 15 years. If you spread that to 20 years, ~$65,000; at 30 years, ~$76,000.

4b. If you are able to additional $$ on the loan each month, you can really speed up the pay-off. Make sure that there is not pre-payment penalty (most reputable mortgage companies have NO pre-payment penalty - in my experience).

More questions? Holler if this isn't very clear.

Nathaniel

 

[big hunter]

Also if at all possible make one extra payment per year and apply it to principal only and you will cut off about 7 years off your 30 year mortgage.

 

[Anonymous-0]

Learning about that PMI is the kind of info I need. What about "closing costs" and such? Does a mortgage cost more than the interest? When I got a loan for my truck, the loan cost $268 in interest, and the principle was 4k so I'm paying off $4,268. Is that how it works with mortgage? Just on a larger scale?

 

[a4t1rat]

I bought my first house @ 18 it was 150000.00 saved like crazy for the 10% I put down. I now have alot of Houses and Appartment buildings and a realestate investment company. your first house is the hardest. if you want to stay around 500/month you will be in the $72500.00 for 20 years or $80000.00 for thirty. this is with 10% down. let me say this just because you get a thirty year loan does not mean you will have to take that long to pay it off. you can get more house for your money if you go a thirty year and pay it off sooner. also depending what property is doing where you live you could make more money down the road on the bigger house say 2 bedroom 1 bath vers 3 bedroom 2 bath ect. or how about you get a investment property to start with like a duplex and rent out half and let it pay most of your payment? also on variable loans some times these are easier to get, get one and keep it for the short term and refinance the house, its easier to refinance usually than the first time buying ... just some thoughts good luck and good for you I hope it all works out for ya.

 

[NBAllen]

Yep, that's a good score. If you've got a solid job and can demonstrate "ability to pay", I'd think you're in pretty good shape.

Nathaniel

 

[Kentucky Ed]

Gee Red. You are hard on the banker. As for the banker not being your friend, unless you have done something to cause that in most cases your banker is your best friend. Or maybe you have experience with the wrong kind of bank.
After 35 years of lending on homes and TRACTORS, I think I"m qualfied to chime in here. A lot of what you suggest is perfect advice. Young borrowers don"t want to hear about down payments and 20 year mortgages, but both are essential for financial health. TO add to what you have said, beware of predatory lenders. In my small community of 2500, I noticed this week alone there are 30 lawsuits involving real estate and foreclosures. Every lender is an out of town mortgage company. I will also say probably 29 of those 30 had no business trying to buy a home at this time. I guarantee none had any downpayment they had saved, and I bet their credit was bad. Sure a banker would look down his nose at those, but it"s the best advice they should have taken. Now they have totally ruined their credit, plus they have no where to live. A few simple suggestions:
1. Don"t expect the bank to buy you a home. Have a downpayment so it"s partly yours.
2. Take care of your credit history.
3. If you can"t afford to pay for it in 20 years or less, find a cheaper home.
4. Be prepared to furnish income verification, and personal details. That makes you look good.
5. Choose a community bank that needs your business, and you will be treated well.
6. And I hate to mention this, but wear your cap the right way, and pull up your trousers.

 

[Anonymous-0]

I always wondered what escrow meant. Thanks. Is getting that escrow payment thing a good idea? Seems like less headaches for me if all those yearly payments were rolled into the mortgage payment.

 

[Anonymous-0]

"6. And I hate to mention this, but wear your cap the right way, and pull up your trousers."

Haha no doubt about that. I don't think I'd even wear a hat going into the building.

Thank you for the advice.

 

[NBAllen]

It's up to you.

On the escrow payments, if you are disciplined to save that money through the year, you at least get a couple bucks in interest in your CU savings acct.

On the other hand, if you're likely to be short on cash (and you know exactly when those bills are due), you're much better off to handle that through the monthly escrow payments

 

[Mathias NY]

I just went through all that last year. Something that people usually forget to mention is property and school taxes. Until you have a large portion of the loan paid off, the bank will take care of paying these taxes for you. The collect the payments monthly in an Escrow account. Here in upstate NY the taxes pretty significant. My monthly mortgage payment is only $650/month, but the escrow is another $500. So even though the mortgage is only $650/month, the home actually costs me $1150

My recommendation for you is to save as much as you can for a few years. The more you can pay up front the less you need to borrow. Closing costs can be expensive. These may include lawyer fees, survey costs, mortgage fees, title costs, 1st years insurance, etc. Usually totaling in the thousands of dollars. It will be good practice to squeaze your income too, because the home will end up costing you more than you think it will...

Good luck, at 20 you still have lots of time to buy.

 

[NBAllen]

Closing costs are all negotiable.

We put $5k down on our house, and the various closing costs came to ~$3k on top of that. There will be lender fees, 1st month's payment, and I don't recall what else.

A little story:
When I bought my house, I had a mortgage broker and WellsFargo both provide an estimate for the loan -

As it happened, WellsFargo had a slightly different fee structure - I told the broker that "her quote was competitive, but 'another lender' was not charging an origination fee" (or something like that) - at which point she waived the fee and knocked another $400 off the closing costs.

Nathaniel

 

[Midwest redneck]

You bet I am hard on bankers,
6 months ago the wife and I went to buy her a new Chevy. I called the bank to see what is entailed in a home equity loan, so I can deduct the interest. The broad at the bank says Bla, bla, bla, you need to have your home inspected for a $300 fee, (keep in mind I only want a $10k loan for a $15k car that I am putting 5K down on.) after listening to this person (broad) explain all the fees and crap I said never mind I will get a GMAC loan.
You may be a nice person Mr. Ed but I dont like to pay on loans, if I can. and I HATE paying interest. I thank God that I only owe $52k on a $270K home. TONS of sweat equity in my home and I am only 38 years old, I built it myself.

 

[JDemaris]

Things can be different at any lending source. If you decide to visit a few banks - keep one thing in mind. They are usually one of two things - a primary lender or a secondary lender. To put that in plain English - some lend their own money (well, sort of their's), and others lend money from outside sources. If you find a bank that lends its own money - it is free to make its own rules about who they lend to and why. If they like you, they might lend while other banks will not. On the other hand, secondary lenders have strict rules and guidelines - usually very strict. Primary lenders are often small independent banks - we have several in my area of New York.
Have you considered some sort of HUD deal? They often give very low interest loans to first time home buyers and often own the houses they sell. I've wanted to buy a few - but cannot since one strict requirement is - you have to live in it - i.e. you cannot buy one just for investment purposes.
An old farm house sold here recently - it was forclosed upon with $120K against it. Farm house, two barns, gravel pit, and 17 acres. HUD listed it for sale on-line. My town government tried to buy it just for the gravel pit - but they were not allowed to buy. They offered $70,000 and got refused. Someone bought the place for $22,000 and a 5.5% mortgage - and they're living in it now.
For myself - I've never had a car loan - and only had one mortgage ever - and that was in 1979. Local family-owned bank had a forclosed farm house with 40K against it. I had $2000, three kids, and was making $5 per hour at a Deere tractor dealership. After some dickering, they sold it to me for $12,000. I put $2000 down, and took a mortgage for 10 years for the $10,000 balance at 14%. I had it paid off in five years and cursed every payment until I owned it. When I made the last mortgage payment - I felt free - for about ten minutes. Then my wife demanded we get a home equity loan - since the house was now worth around $70K and spend the money on a big vacation, a new car, and some home improvements. We got divorced not long after that. I was miserable at that time - but in retrospect - it was the best thing that ever happened to me. I later found a mid-western girl who is even cheaper (and smarter) than me - and we've been happily married ever since.
Obviously, things have changed a bit. Less family-owned banks around, higher house prices - but much better interest rates and easier credit in many cases. Main thing is - whatever you want to buy, it needs to - at least - retain its value. That means NOT finding a house with a temporarily high price that might go down later and leave you with negative equity.
One example is one of my sons in Colorado. Makes 100K a year working for IBM - which is more than I ever dreamed of making. But, he spends it faster then - and before - he makes it. He bought a new house in Longmont - in a development in a desert type area. Took a full variable-rate mortgage for $325,00 - no down payment and his monthly payments are for the interest only. He was convinced it would increase in value and that would be his equity. Now, three years later - he wants to move to Texas - and he's told his house is only worth $275,000 now. So, to sell and get out - he will be in a huge financial hole.
To the other extreme - I have another son who bought an older house a few years ago in Westminster, Colorado. He had just gotten out of the Navy - and had $15,000 for a down payment. He bought an older home for $120K in a suburban neighborhood - with a fixed mortgage - and the monthly payments pay taxes and principal as well as interest. The house is worth a bit more now, then what he paid - instead of less. So, he gets more equity into it as time goes along - and if he decides to move - he'll be able to do it.
Good luck. If I ever had to get a mortgage again - I think I'd shoot myself. But, I'm not as young and energetic as I used to be.

 

[TomH in PA]

Ask around for recommendations on where to get a loan. I've had good experiences with local banks, but I would never use a mortgage broker. Of course some banks are better than others, be very suspicious it they try to add in points (loan origination fee) on top of the interest.

Owning a house means you not only pay the mortgage, taxes, and insurance, but also any repairs (roof, furnace, etc). So save up enough to make the down payment and still have some left over for emergencies.

Also compare monthly payments for different loans. Last time I checked (a few years ago) the interest rate was enough lower on a 15 year loan versus a 30 year that the monthly payment was not all that much different (and of course a lot more went toward paying off the load and less to interest).

While you're saving you might consider putting your money in a Roth IRA. There is some tax benefit, and no penalty to withdraw it for a first time home buyer.

 

[JT]

My son is in th process of buying a house, he is also young, 23, has no credit, so his bank looked down their nose at him, he went to a mortgage compnay, he needed no down payment, as the hosue he bought had been apraised at 59,000.00. His interest is a fixed rate of 7.25%, his payment is 391.00 a month for a $53,000.00 home for a 30yr loan. His insurance he is paying yearly at 530.00. his taxes will add about $100.00 a month, so he is about 500.00 a month. He thinks 7.25 is a little high, but I tod him, be patient, build equity in his house, build his credit, then look at finding a lower rate. He bought an small older house in a real little town, about 30 houses, but it is a start for him and it puts my 2 grandsons less than 1/4 mile away, good for me.

 

[kyplowboy]

If you have alot of time and not much for a down payment, try FSA. I was approved for a farm in April and close next week so it may take a while to get the money but you can"t beat the intrest. If you go to a bank try to find a local one. One that still has the name of the town in the name of the bank has always been better for me than a big one. The bank I go to I deal with the cheif loan officer, VP, and owner"s son at the same desk. If you have any old local banks around they will take more time to talk to you and try to help you out as best they can. There are a few left round here where your last name still means some thing. There is nothing more agrivating than walk"n into the bank, ask"n a question and them have"n to make a long distance phone call to answer it.

Good luck.

Dave

 

[Eric SEI]

If you live in a sufficiently rural area, you should also check your local Farm Credit Service for home ownership loans. Just walk in, pick up some brochures, and ask a couple questions to find out how to qualify. Cost you a little gas and a little time, it might be for you.

Good luck.

 

[Waterloo]

In-to-deep,

You could obtain the following loans for $500 per month at 6.9% APR:
15 Years / loan amount $55,975
20 Years / loan amount $64,993
25 Years / loan amount $71,386
30 Years / loan amount $75,918

 

[NE IA Dave]

I have always pointed out to my children the magic number of 72. For easy understanding take your intrest rate into the magic number of 72. It works with any intrest rate. In theis case of 10% intrest every 7.2 years your money doubles. This is not to discourage or incourage you, but to slap you with reality in a simple form.

I is poor, and paid alot of intrest in my life, and try to keep the 20% plus intrest rates away from my kids door.

Good Luck on your decesion, rent isn't always a fun thing to pay either.

 

[gorilla]

If you are able to qualify for a mortgage AND make the payments then find you a house and do it. The younger you are able to do that the better off you are. That cant be overstated. You wont be throwing money away on rent and you can write the mortgage interest and property taxes of of you income tax. If you can find a place for a good price that is in decent shape but just needs paint and TLC then go for it. Dont get in a big hurry. Find the right deal. When you qualify for a loan, every credit card company in the world will offer you a credit card. DONT GET A CREDIT CARD!!!! Pay cash as you go to do stuff to your house. Your mortgage payment will stay relatively the same (will fluctuate when taxes or insurance go up) but your salary should increase over the years and your mortgage should get easier to pay. Do not get a adjustable mortgage! Get a fixed rate. Plan on staying put for a few years but as you pay on the house and the price of real estate goes up you will build equity. YOu can take that equity and buy you a bigger or better place if you want to. Be sure and look hard at the real estate market where you plan to buy. Price homes and know what a good deal is when you see it. Good luck. Gorilla

 

[Tradititonal Farmer]

Regardless I'd hold off for a year and see how the real estate markets go.More and more anaylist
are saying real estate will keep going down in 08.In the meantime 1)get a 2nd job and put every penny into a house down payment fund 2)Do not buy any new big ticket items especially on credit
like cars or big screen TVs.

 

[MarkB_MI]

You've received a lot of good advice. A few more points:

1. The general rule of thumb is that the monthly rental OR purchase cost of a home is around one percent of the total price of the property. So if the house is worth $100,000, it will cost you 1000 a month to own it or to rent it. (In theory this number changes with interest rates, but in practice it's not much, due to fixed escrow costs.)

2. Another rule of thumb is that your house payments should not be more than one-third of your gross (before-tax) income. One-quarter is better, because you need some money for repairs, particularly on an older home.

3. When shopping for a mortgage, ask for the payments on 30, 25, 20 and 15 year loans. The mortgage company will always quote a thirty year loan, saying "it's the standard". But after they're done grumbling, you will find that there is almost NO difference in the payments on 25 and 30 year mortgages! 20 year mortgages will be a little higher. 15 year mortages will be quite a bit higher, but they will usually give you a lower interest rate on a 15 year mortgage which will help to offset the shorter term. And when you do the closing CHECK to see that they gave you the term you asked for. Mortgage companies will often make out the paperwork for 30 years even if you applied for a shorter term.

3. Buy a book of "Loan Amortization Tables". You'll find them at most bookstores. Sure, today you can find calculators on the web, but I like to have the numbers right in front of me where I can quickly do "what-ifs" just by looking in a different column. I bought mine thirty years ago and I still use it every time I think about taking out a load.

4. You need to save AT LEAST ten percent of the purchase price of the house, even if you only have to put five percent down. You will need the other five percent for closing costs and "pre-paid" items. (Pre-paid means it goes into your escrow account.

One last thing: A house is NOT an investment, it is a place to live. If you think you're going to move in the next two or three years, think carefully about purchasing a home. Remember: It is ALWAYS easier to BUY real estate than it is to SELL it. You need to keep your house for at lease two years to recoup the costs of buying and selling it.

 

[Anonymous-0]

I pay for almost everything with a credit card. I ALWAYS pay the balance off each month. I earn points and get things at CABELA's for free. If you are on a tight budget, pay for everything with cash. It gives you a better sense of how much you are spending.
I have ALWAYS paid an amount that would be equal to 2X the amount of the principal plus the interest each month. By doing this a 30 yr loan will be paid off in about 15yrs.
Fixed rated will be higher at the start but it will not blow up on you. You will always know where it is and it will always be affordable.
SDE

 

[T_Bone]

Hi ITD,

Another loan type is FHA where you pay a higher APR to insure the loan for a lender, usally 1/2% higher. Some times it makes a difference in "if" you can afford the payments. Upon early FHA pay off don't to forget to file for a refund of the unused loan insured amount.

Another alternive is a used 5th wheel RV on a private piece of property. This also makes a good starter home without a heavy up front cost and beats paying rent if you buy right. Uaually 10yrs or older, RV prices stablize until there 15yrs to 20yrs old then they drop in 1/2. Good advantage if you don't know where you wanna live or have to travel for work or school.

T_Bone

 

[HENRY E NC]

An old mans perspective. I may have missed it but if you have less than 10% down most lenders want mortgage insurance, another useless expense. I also believe that you can presently find a mortgage for less than what you stated. Every tenth of a point is worth a lot. Some lenders still try for points up front. Stay away from them if possible. I have had good luck with Washington Mutual one of the biggest lenders in the country and usually very straight forward. My 5 cents worth (Inflation)

 

[Anonymous-0]

As of last week, 30yr. rates were at 6-1/8% around here. At 6% , $509 will give you an $85,000 mortgage. You can save up all you want, but costs of homes have for the most part always risen and saving for 5 years probably will not offset what the rise will be.. This last year has been an exception but not the rule. Besides, every rent payment only gives you a place to stay. You aren't advancing yourself. Yes you have taxes and upkeep on the place, but the taxes should be deductable and the upkeep will add value if you sell it later. My advise is if you can swing it now and you find a place you like, buy it now. Check on how creative the bank will be with closing costs. I just sold a house to a young couple and they are adding the closing costs into the mortgage so they don't need so much cash at closing. You can also get mortgages with nothing down. There are lots of options out there. Go to a bank that you feel comfortable with and they will work with you. Our state has a housing program for first time buyers. 30 yr. rates are at 5-1/2 %. You can get that much on CD's at some banks so you can get "free money". Stay away from the adjustable rates though.

 

[CJ3b_jeep]

What a great question. I wish I had bought a home when I was your age. It really is the only way to build wealth for your future. My advice is save, save, save any money you can get your hands on. If you walk into a deal like that with 10-15,000 bucks you'll be well ahead of the game. I would not sink everything I had into it, no matter what it looks like or what people say, there are things you'll need money for as soon as you move in. Furnaces, water heaters, stove fride, they all break and/or need some attention. If you don't know how to build things, go out and learn. The more improvements you can do by yourself, the more they are worth to you when you upgrade. Good luck, home ownership will change your life.

 

[dave guest]

Get a land contract if you can. They can be written almost anyway you like. I bought seven houses this way. Four with no interest. You and the seller put this together. Get a lawyer for lsure.