A mortgage is a loan that a person obtains to buy a house For most people, this will be the largest purchase they will make in the course of their lifetime…. What are some of the most important things to know about mortgages?

Mortgages can either be The interest rate is the same over the course of the loan The interest rate is the same over the course of the loan Comes in 15, 30 or 40 year increments Comes in 15, 30 or 40 year increments 30 year fixed loans are the most common 30 year fixed loans are the most common Short for “Adjustable Rate Mortgage” Short for “Adjustable Rate Mortgage” The rate can fluctuate based on current market conditions The rate can fluctuate based on current market conditions Usually the rate is locked in for the early part of the loan, then it adjusts to market conditions Usually the rate is locked in for the early part of the loan, then it adjusts to market conditions

ARMs are more risky than Fixed rate mortgages because the rate eventually becomes variable Which is great if the market interest rates drop But not so great if the market interest rates rise

A worst case scenario? Here’s a story taken from the Wall Street Journal… A man on a fixed income of $3250 per month took out a $280,000 mortgage with a 5 year ARM He thought the payments would be fixed for 5 years His payment initially was $1300 per month The payment jumped to $3800 per month during the second year of the loan

How much can you afford? People should not spend more than 28% of their gross monthly income on housing Total debt per month shouldn’t exceed 36% of gross monthly income This includes credit card debts, school loans, car loans as well as the mortgage

If your monthly payments exceed the 36% level, you will have very little extra money in your budget for other things This is called being

You should attempt to get Pre-qualified for a loan in order to know how much you can spend on a house The lender will look at your income and credit history as well as the amount of cash you have for a down payment Traditionally, lenders required a 20 % down payment Usually, the larger the down payment, the lower the interest rate you can secureUsually, the larger the down payment, the lower the interest rate you can secure

Talked about Equity, Selling a house before your mortgage is done, Short sales, foreclosures

However, you can still qualify for a loan with less than 20% down You will have to pay PMI (private mortgage insurance) PMI is an extra charge each month…usually between $50 to $100 This gives the lender extra protection if the buyer can’t pay for the loan You can lower your interest rate by paying POINTS This is money the buyer pays to the lender approximately 1% of the loan value per point

Why do rates matter? Let’s look at a $300,000 fixed rate mortgage at 7% you will pay $ , 12 times a year Payment Number Payment Amount Payment to Interest Payment to principal Total paid to principal Total paid to interest Left to pay $ Year: 1 Top Top Payment Amount Payment to Interest Payment to principal Total paid to principal Total paid to interest Left to pay 1$ $ $ $ $ Early in your loan, most of your payment goes towards the interest you pay to the lender

Year:30 Top Top Payment Amount Payment to Interest Payment to principal Total paid to principal Total paid to interest Left to pay 360$ $11.57$ $ $ $0.00 Facts about your loan You will pay a total of $418, in interest to the bank (this is basically the bank's "profit" for lending you the money). $300,000.00$418,526.28The total you will actually pay to repay this loan is: the loan principal + bank's profit = $300, $418, = $718, You start paying more money towards your loan and less to the bank's profit only after 21.1 years. On average, you pay 2.4 times more money each month towards the bank's profit than you do towards the money you borrowed. The bank's profit is 1.4 times the amount of your loan.

These numbers don’t include property taxes, which will increase the monthly payment as well In case you weren’t aware, property taxes almost never decrease from year to year….. The average Property Tax in Orland Park for 2006 was $6,027

$100,000 Estimated Market Value X.10 Assessment Level (10%) $10,000 Proposed Assessed Valuation X State Equalizer $28,439 Equalized Assessed Value - 5,500 Homeowner Exemption $22,939 Adjusted Equalized Value X.10 Sample Tax Rate (your tax rate could vary) $2,293 Estimated Tax Bill in Dollars This is how Cook County property taxes are calculated This homeowner would owe $ per month in property taxes If you are paying a mortgage on the house, the mortgage company will collect the property taxes from you each month and then pay the tax bill for you Which means this homeowner will have to pay not only the mortgage amount, but an additional $191.08

You also have to figure in closing costs when you get a mortgage These are fees that the lender includes as part of issuing the mortgage. They can include: Application fees; Title examination Abstract of title, title insurance, and property survey fees; Fees for preparing deeds, mortgages, and settlement documents Attorneys’ fees Recording fees Notary appraisal Credit report fees They are usually between 3-6% of the mortgage amount

Decide what type of loan is best for you, a fixed rate or an ARM Get pre-qualified for a loan: it will give you the amount you will be able to spend, and you can act quicker to get that “perfect house” Be prepared for closing costs Mortgage and Home buying “DOs” Mortgage and Home buying “DON’Ts” Don’t buy a house at the very top of your price range Don’t agree to a mortgage unless you understand all of the terms Don’t forget that your mortgage payment will include property taxes as well as the loan amount…making the payment more than you may have initially calculated