If you have never bought a home before, then todays real estate market can be very confusing and intimidating to say the least. With the subprime loan mess finally catching up with lenders and homeowners, real estate is not so secure of an investment anymore, right? Although some cities will have bigger pullbacks than others, real estate is still a great investment if you plan on living in your house for more than a few years. Sure, there are periods of time where real estate will correct pricing inequalities in some 'bubble' regions, but you are still better off owning a home and paying a mortgage every month versus renting for the next 15 to 30 years. No one can predict the future, but let's just say that the house your buy only goes up in value a bit over the next 30 years, at least you own it at the end of the time. Otherwise you will be wasting rent money on apartments, condos or homes over that same time frame and have nothing to show for it. Since you have to live somewhere, why not work on owning the piece of property instead of renting.
Finding a mortgage loan that fits your needs is very important since it takes time and money to get a home loan and no need in having to refinance every few years with gimmick mortgages just to eak out an existence. Ideally, you have 10 to 20 percent for a down payment and can go with a 30 year fixed rate which are still some of the lowest in the history of mortgage lending (6% or lower). You can get even lower rates if you are willing to pay 'points' on your loan which means you pay say 1% of the loan in order to get a 1/2 point reduction on your interest rate. You can use the mortgage calculator link HERE to play with the numbers and see how much you can save long term by paying points up front. 5/1 ARMs are good loans for those individuals or couples that know they will not be staying in their homes for more than 5 years as the mortgage will need to be refinanced within that time. You get a lower rate for now, but will have to get a new mortgage no later than 5 years down the road. The drawback to this type of loan is that you don't lock in a low rate for 30 years like you could with a 30 year fixed and you take the chance that interest rates are not going to go up in that time frame. The recent mortgage problems that many people either have faced or are currently facing are the interest only loans wherein you just pay the interest on the mortgage and no principal. These loans are very risky since you may be underwater in your house after a year or so if prices go down at all in your local metro area. That has happened to 100,000's of people in the last year or so and they are pretty much forced to foreclose on their homes or try to get a new loan they can afford. Any good financial advisor will tell you to treat your home NOT as a bank account but a long term investment knowing you can live there almost free of charge long after you have paid off your mortgage. People looking to flip houses and the speculators in certain cities like Las Vegas and Miami have taken out interest only loans to initially cover the mortgage with no intention of ever living in the home full time or at all. They wanted to hold the house long enough to have the real estate prices go up and then they could sell for a profit. Unfortunately, that doesn't always happen and we are seeing the fallout from these types of loans. Some of the top mortgage lenders are Countrywide, Washington Mutual, Wells Fargo Bank, Chase Bank, Bank of America, and ABN AMRO.
30 Year Fixed Rate Mortgage:
Perhaps the most conventional type of loan for most homeowners, a 30 year fixed mortgage will give you a guaranteed rate for the next 30 years without fluctuations. In most markets a 30 year fixed is a great way to go since housing is somewhat affordable and making the payment shouldn't be too hard. In some parts of the country like California, Florida, and parts of New York City real estate prices are so high that having a convention 30 year fixed loan may not be affordable and that's where 5/1 ARMS or Interest Only loans come into play (we don't recommend those). With 30 year fixed rates at or below 6% interest you will get a great loan and plenty of time to pay it off. Some lenders are even starting to push 40 year fixed so that those in the expensive areas can afford home ownership without getting involved in the adjustable rate and interest only loans which lead to complications down the road. Bankrate.com is one of the top websites for finding the lowest available rate in your area. Just type in your state, city, amount needed to borrow, down payment, points, and type of loan to see which lending institution gives the best offers. A mortgage broker can also assist in this process. We have found that Countrywide and Wells Fargo offer some of the lowest rates on 30 years fixed mortgages. 15 year mortgages are also possible if you think you can manage the higher monthly payments, but the good news is that you will have your house paid off in half the time. Those rates have hovered around 5.25% for a 15-year fixed.
5/1 Adjustable Rate Mortgage (ARM):
Lots of potential homeowners go with a 5/1 ARM loan since they get a locked in rate for the first 5 years of the loan. Many choose this option since they don't anticipate staying in the home longer than that. Their payments remain constant and affordable, although after the 5 years are up, you will find that your rate is based on an adjustable rate mortgage which is tied to the 1 year treasury index. Sometimes this can work in your favor while other times you could be looking at mortgage rates 3 to 4 % higher than you originally paid at the start of the loan. It's the gamble that some people are willing to take and worse case scenario is that you refinance (hoping rates haven't jumped to high) or you can always sell the home and move on. The average rate on a 5/1 ARM as of Dec 2007 was about 5.46% with some as low as 4.5% (if you pay points). At least with a 5/1 ARM your payments are going towards the principal amount during the 5 years, unlike interest only loans (see below). Check out the latest rates at Bankrate.com.
Interest Only Mortgage Loans:
Lending practices in 2005 and 2006 became very loose and too many home buyers were able to purchase a home that they could not really afford. They did this by getting an interest only loan which means they would be paying only the interest on the loan every month instead of both principal and interest combined. This was the only way they could get into the house and often lenders or brokers knew that the long term effect would be bad but the loans went through nonetheless. The fallout has been terrible as more of these loans have reset and plenty more still are due in the next year or so. The real problem happens when the home value drops and the homeowner has never put any payments towards the actual mortgage and they are "underwater" (the house is worse less than the mortgage on it). Getting a loan has become much more difficult these days, even for people with high FICO scores, so many people can't refinance and are stuck with a house that is worse less than they paid for it. They are then forced to foreclose or try to work out a deal with the bank to rework the interest rate or monthly payments. For more details on interest only mortgages go HERE. Unless market conditions change, we DO NOT recommend getting into an interest only loan any time soon.
