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A Guide to Your First Home Loan

By No Author
Learning & Life Columnist

Kate Jackson knew the time was right to make the transition from renting to owning a few years after college graduation. She realized she had settled into Seattle and wasn't moving anywhere soon.

A handy-around-the-house type, Kate was tired of not being able to make home improvements to her rented apartment, and more than anything, she realized that renting didn't make financial sense anymore.

"If I was going to spend all this money on housing anyway," she says, "I figured I might as well spend it on a house I'd get to keep long term." So she plunged in, found an adorable home in Lakeshore, Washington, and is now proud of both the great new fireplace she's installed and the terrific rate she got on her 30-year fixed rate mortgage.

Just like Kate, you need to think through some basics before deciding you're ready to buy. Consider financial factors like your credit history, your current employment, and whether or not you have the savings to cover a down payment and closing costs on a house.

Also, you should decide if you're ready to settle down in one place for awhile. Once you've assessed your readiness and given yourself the green light, it's time to get down to the business of shopping for a mortgage.

The Mortgage Low Down

There are four major components that will determine your monthly mortgage payments:

1. The Amount of Your Down Payment.
2. The Amount of Your Loan (The Principal).
3. The Money You Have to Pay in Order to Use that Money (The Interest).
4. The Repayment Terms.

If you put more money down, borrow less at a lower interest rate, and pay it off over a longer time period, then you'll drop your payments. Keep in mind that although a longer repayment term will decrease your monthly payments, you'll pay more interest overall, which will cost you in the long run.

Figuring out exactly how much you can afford to spend each month is critical. Once you've got that number firmly in place, you can start to play around with the other variables.

In addition to considering monthly payments, be sure to consider your need for back-up savings. While a big down payment is great, you want to be sure you can cover expenses like closing costs, taxes, insurance, and essential home repairs.

The last thing you want is to move in to your dream house, cash free, only to realize that your toilet, your dishwasher, and your air-conditioning system all need replacing. Welcome home!

State of the Mortgage Rate

There are two main types of mortgages: fixed interest rate mortgages and an adjustable interest rate mortgages (often called ARMs). With a fixed rate mortgage, you're locked in at one interest rate for the life of the loan. If you're looking for security and you're not planning on reselling your house anytime soon, this can be a great option (especially in the current economy where interest rates are at historic lows).

With an ARM, you'll get a lower interest rate to start and then a few years down the road, your interest rate will begin to fluctuate with the market. If you're buying a fixer-upper that you're planning to sell in a few years, an ARM is the perfect fit. The same is true if you're looking to buy when interest rates are high and you want to be able to follow them back down.

Thirty-year fixed mortgage rates are currently averaging 5.79 percent. With interest rates this low, buying a home makes more sense than ever.

When it comes to a decision as big as your first mortgage, make sure you do your homework, both to ensure you get a great deal and to guard against predatory lenders. If something seems off - strangely high interest rates, excessive fees, unexpected costs tacked onto the mortgage - step back and make sure you're working with a trustworthy mortgage broker. Most of all, savor the joy of buying your own little place to call home.

Sources:

• Freddie Mac, Mortgage Market Study, March 2005, http://www.freddiemac.com

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