I became a first-time homeowner this year, and in the process I learned a lot about mortgages -- many things surprisingly interesting or unexpected.
Here are nine things that you may not know about mortgages:
1. You can buy a house with a down payment as little as ... 0%. That's right, no down payment at all. 100% financed via a mortgage. You may even find a government agency that will help with your closing costs. These options aren't available to everyone, but first-time homeowners and/or homebuyers of limited means in particular may be able to find good deals here and there. Check out the Department of Housing and Urban Development website for more info. Here's its list of special programs offered in various states.
2. Adjustable rate mortgages (ARMs) come in many varieties. You might think of an ARM, as I did, as a mortgage with an interest rate that goes up or down each year. Some ARMs do work that way, but consider this: If you're pretty sure you'll be staying in your home for just five or six years, you can get something like a "5-1" ARM, where the rate is fixed for the first five years, after which it's reset each year. Whereas 30-year fixed mortgage rates are as low as roughly 5% these days, 5-1 ARMs are in the 4% range. That 5-1 ARM might save you $100 per month. There are 7-1 ARMs, 10-1 ARMs, and many other related beasts, too.
3. Adjustable-rate mortgages are generally limited in how much they can adjust each year. Naive renter that I was, I always assumed that ARMs were especially risky because if interest rates skyrocket over one or two years, your mortgage rate will also skyrocket. Fortunately, I learned that ARMs typically have caps on how much rates can increase each year. (Still, over the long run, they can increase a lot.)
4. Small changes in interest rates can make a big difference. Imagine that you recently got a 30-year fixed mortgage on a $200,000 house at 6%, with a 20% down payment. That results in a monthly mortgage payment of roughly $959. You might not think it's worth refinancing now, with rates around 5.375%, but think again. The same kind of mortgage at that interest rate results in monthly payments of about $896. The difference per month? $63. If closing costs on the refinancing will be $2,000, just divide that by $63 and see how many months it will take before you break even: 32. So if you're planning to live in your home for at least three years, refinancing may well be worth it. Learn more about refinancing in our Home Center.
5. Mortgage brokers can be very useful for many people. My uncle is a mortgage broker, but I'd never really discussed mortgages with him until I began house-hunting. In case you don't know, a good mortgage broker will advise you on what kinds of mortgages would best suit you and will find you the best rate and deal that he or she can, searching through the loan products of many lenders. Of course, just as with many professions, there are conflicts of interest in the mortgage-broker biz that can result in your getting ripped off. One way to avoid that is to read up on the topic and to seek out ethical mortgage brokers. The Mortgage Professor's website is a good place to learn more.
6. Not everyone needs a mortgage broker. Mortgage brokers tend to be most useful when you've got some financial issues, such as a poor credit history. If you're closer to being a best-case buyer, though, you may not need his or her services. For example, if you've got a pristine credit report and plan to put at least 20% down on your new home, you may be able to just walk into a few local banks and ask for their best rates.
7. You might find even more attractive mortgage rates from your local credit union. For example, at the time of this writing, my local bank is offering 30-year fixed-rate mortgages for 5.375% (with no points). But a credit union to which I belong sports 5.25% rates. If you don't belong to a credit union, you may be able to join one through a family member, your workplace, or an association to which you belong. Learn more about credit unions in this article.
8. Some websites will crunch many interesting numbers for you. Here's a mortgage payment calculator where you can learn exactly how much of each mortgage payment will go toward the principal of the loan, vs. interest. (This might be of interest, since the interest portions are deductible on your tax return.) In this example, only about $200 of your $1,200 monthly mortgage payment goes toward the principal in the first year (with, therefore, $1,000 being interest), compared with about $800 in year 25. We've got some nifty calculators here in Fooldom, too, such as one that will help you determine your mortgage-related tax savings.
9. The world of mortgages isn't a static one. Here's an intriguing new option: portable mortgages. Earlier this month, E*Trade
I hope you found at least some of the above tidbits interesting. Do your fellow Fools a favor and share some interesting mortgage information or experiences of your own on our Buying or Selling a Home discussion board. Or just drop by to see what others are saying. (We offer a painless free trial of our entire discussion board Community.)
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Selena Maranjian is smarter than a speeding bullet and faster than a tall building. For more about her, view her bio and her profile. You might also be interested in books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.
