ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Homing In on Your First Mortgage Part 2

Updated on May 31, 2010

What Kind of Mortgage Should I Get?

Mortgage loans fall into two basic categories: fixed rate and adjustable rate. With a fixed-rate mortgage, the interest rate—and thus your monthly payment—stays the same throughout the loan. Adjustable-rate mortgages (ARMs), on the other hand, change periodically and are tied to an index such as the interest rate on a one-year Treasury bill.

Which is better? Determine how long you're going to stay in the house and realize that the shorter the time, the more an adjustable rate makes sense. Beware of getting caught in the ARM trap which saw millions thrown out of their houses in the foreclosure crisis though. Read the fine print and make sure you can still afford the ARM when the rates go up!

Here's why: ARMs usually offer an initial "teaser rate" that's lower than any other mortgage on the market. If you know you'll be moving again in three or four years, your average interest rate, even with yearly upward adjustments, will probably be lower than you could have gotten with a fixed-rate mortgage. However, if you end up staying and the rates skyrocket, then get used to either living on KD or living on the streets. Many thousands of homeowners before you didn’t believe they could end up in either situation and that’s where they find themselves today!

Other considerations:

Go with an ARM if you want a house at the upper limit of what you can afford. In my first home I didn't qualify for a fixed-rate mortgage of 10 percent, the going rate when I bought, because payments would have exceeded 28 percent of my income; the monthly payments on a mortgage of $150,000 would have been $1,317. But I did qualify for an ARM at 8.75 percent. At this rate, my monthly payments were $1,180.50.

Opt for a fixed rate if the thought of future payments going up has you reaching for the Maalox. Most first-timers choose a fixed rate because they want predictability. If interest rates are low, lock them in with a fixed rate.

What About Points and Closing Costs?

A "point" is 1 percent of a loan amount; the "points" you owe at closing are a fee paid to your lender as part of your mortgage deal. The lower the interest rate, the more points you'll usually have to pay at closing. For example, many banks recently offered fixed-rate mortgages of 3.25 percent, while the national average was around 4 percent. The difference? The lower-rate loans generally required an up-front payment of about two points, or 2 percent of the loan amount, at closing — remember, that's in addition to the down payment. Points aren't all you'll have to pay at closing, of course. Attorney's fees, homeowner's insurance, document fees, and other miscellaneous charges will also be due. A general rule is to set aside a minimum of 3 percent of total house price for these costs.

Should I Get a Pre-Approved Mortgage?

Absolutely. Buyers with an approved mortgage in hand assure the seller that their offer is serious.

Even if home sales are sluggish in your area, don't shrug off the idea of pre-approval. When buyers are scarce, sellers may not want to take their home off the market for six weeks or more while waiting to see if a bidder's loan is approved.

Will Home Ownership Affect My Taxes?

Yes, and very, very favorably. Buying a home is one of the two biggest ways to lower your taxable income. Points, interest, and real estate taxes are all deductible in the USA, and the savings can be substantial. If, for example, you have an 8 percent mortgage for $150,000, are in the 28 percent tax bracket, and pay $250 a month in property tax, you'll lop about $5,800 off your tax bill.

Back to Start

Comments

    0 of 8192 characters used
    Post Comment

    • nicomp profile image

      nicomp really 

      8 years ago from Ohio, USA

      My opinion is that if one must carry debt, deductible debt is preferable. No debt whatsoever is optimal, but at least the government will give us back some of our money by permitting us to not pay taxes on interest paid.

      For example, paying the lender $100 means that we don't pay taxes on that $100, which takes $28 (28 per cent tax bracket) off our tax bill. But we still don't have the original $100 anymore. On the other hand, if we didn't have the interest payment, we would keep the $100 and pay the $28 in taxes, which leaves us with $72 to buy groceries. It's a shell game at the federal level.

      By the way, not all mortgage interest is tax-deductible. Mortgage holders eventually reach a point where the default deduction allowed on the 1040 form exceeds the amount paid in interest; it's advantageous to take the default deduction and face the fact that your mortgage interest ain't payin' no more.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)