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Important mortgage facts

Buying a home and taking out a mortgage go hand-in-hand, unless you are paying cash for your purchase, which is pretty much unheard of these days.

Whether you are a seasoned home-buyer or a first-timer there are many things to know and learn about mortgages and the whole process in general.

A July 17, 2005 article by Selena Maranjian of fool.com, “10 things to know about mortgages,” gives some insight into mortgages that even the most experienced home buyer may not know about.

One thing that many people do not know is that you can purchase and finance a home with little or no money down. Although this is definitely not recommended, because it means higher interest rates and payments, contrary to popular belief, it is possible.

“ You can buy a house with a down payment of 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 may be able to find good deals here and there.”

There are also many things that people do not know about a popular mortgage product called an adjustable-rate mortgage or ARM. They actually come in many varieties and there are limits on high the interest rates can rise in an ARM.

“You might think of an ARM 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 called a ‘5-1’ ARM, where the rate is fixed for the first five years, after which it fluctuates each year. Whereas 30-year fixed mortgage rates can be as low as around 5.5% these days, 5-1 ARMs are in the 4.5% range. That 5-1 ARM might save you $100 per month, or $1,200 per year. There are 7-1 ARMs, 10-1 ARMs, and many other related beasts as well. ARMs are generally limited in how much they can adjust each year.”

One important thing to keep in mind though is that although there are caps on how high they can adjust each year, a raise in interest rates can have a huge affect on your monthly payments, and end up costing you thousands of more dollars each year.

In terms of who handles your mortgage, many people find that hiring a mortgage broker is very helpful, although not everyone needs one.

“Mortgage brokers tend to be most useful when you've got some financial issues, such as a poor credit history. 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.”

The mortgage industry is constantly changing and altering its products according to the current state of the market. New types of mortgages are coming out all of the time, so it is important to keep up with the current trends.

“ The world of mortgages isn't a static one. Here's an intriguing, relatively new option -- portable mortgages. In 2003, E*Trade (NYSE: ET) introduced mortgages that you can take with you, transferring them from one house to another if you move. You pay a small premium in interest rates for the privilege, but given that most people these days don't stay put for 30 or even 15 years, this option could well be worth it. I won't be surprised if additional lenders begin offering portable mortgages soon.”

“There's much more to learn about mortgage options. Wachovia (NYSE: WB), for example, is offering a mortgage designed for teachers. Merrill Lynch (NYSE: MER) introduced blended-rate mortgages last year, featuring advantages of both fixed-rate mortgages and ARMs. Freddie Mac (NYSE: FRE) offers multifamily mortgages. Lots of lenders offer interest-only loans and other extreme mortgages.”

These mortgage facts should either help you with your purchase of a new home, or with dealing with the current mortgage on the home you have now.

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