Thursday, 10 October 2019

Home Mortgages For Dummies - How Does It Work

We are going to be talking about mortgages for dummies. In today's world, there is a dizzying array of mortgages available and this sometimes makes it confusing to people who are trying to learn about them. But at the very hard of it, just realize this. A mortgage is nothing more than a loan that is secured by real estate. 

Have You?

At some point in your life, you have probably received a loan or given a loan to somebody, maybe it was something very simple like loaning your bike or maybe loaning your friend 10 bucks.

Loaned Money To Buy A Moped

But just realize a loan is a loan at the end of the day. For example, let's just say you needed to buy a moped for work, you needed a form of transportation you had no money, so, you ask your roommate for the money to buy the moped. All loans come with certain terms, so, let's say that your roommates wanted his money back in one year at 4% interest with monthly payments of $50, and keypoint. If you default, he gets to keep your moped.

Mortgages Involve Real Estate

A mortgage is no different except that it involves real estate. If you violate the terms of the mortgage or the loan, they are going to take back the piece of real estate as opposed to a moped.

  1. Long Time Periods (30 Years) at 4% Interest
  2. Monthly Payment

Although there are many different types of mortgages, they usually have these types of terms. Long periods of time say 30 years at a certain yearly rate like 4%. Monthly payment and they are amortized over this time period.

Amortization Is Difficult To Understand

Amortization is one of the building blocks of the modern mortgage, and it's very ironic because amortization is very difficult to understand and it's never taught in public schools or any personal finance courses.

  1. Payback the entire loan at the end of the year plus Interest
  2. Equal payments over each month

In our moped example, our roommate wanted us to pay the payment in equal payments each as opposed to paying the lump sum of the moped as well as the interest at the end of the term. That is the key point of amortization. Essentially with amortization, you are paying off a little bit of the moped and a little bit of the interest over each month and hopefully, by the end of the term, you are going to end up owning the moped and having paid the interest that your roommate wants you to pay.

Not Amortized - Huge Payment

With a non amortized loan you would have to pay the whole entire moped off and you'd have to pay all of the interest at the very end of the year when the loan came due.

Mortgage Example

A very simple mortgage example would be this. 

  1. You are buying a $100,000 house
  2. You are getting a yearly rate of 3.92%
  3. It is amortized over 30-years

You will see what your monthly payment would be each month. If you read the article above.

Negotiate The Most Favorable Terms

Personal loans, moped loans, home mortgages, they are all the same and if I can give anybody the best piece of advice when you are trying to get a loan, is you want to negotiate the most favorable terms especially for a mortgage which is very long and very expensive.

The best way to negotiate a loan is

  1. Put down the largest down payment you can.
  2. Negotiate rate down as low as possible

The lower the rate the bigger the downpayment, the less risky the loan and the lower the payment. 

Government Subsidized Loan

  1. Low Rates
  2. 30 Years
  3. There Is No Catch

If you are a first-time homebuyer and I highly suggest you check into government-subsidized loans which have very low rates, loans amortized over 30 years and because they are government subsidized there is really no catch they are government programs aimed at helping first-time homebuyers buy houses.

Bank Scrutinize You Financially

One thing you must take into consideration when getting a mortgage is that you are going to have applied for a mortgage through a bank or some type of lender, these people are going to scrutinize your financial history.

How To Get A Good Loan

  1. Good Credit 
  2. Stable Income 
  3. Have a saving, 401k, IRA, etc.

In order to increase your negotiate power and increase the likelihood that you can get a good rate on a loan, you need to impress banks and lending institutions with things like good credit, a nice stable income, and assets in savings account 401k or some type of bank account.

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