This is my third post in a series for first time buyers - Mortgages

Mortgages are the topic of hot discussion these days. If you are a real estate novice here are some basics. first some Trivia: The term mortgage is really a misnomer because it is actually not a loan, but a security instrument, a piece of paper that a borrower gives to the bank that allows the bank to foreclose if payments aren't made on the home loan. Most people who use the term "Mortgage" are referring to a home loan. For the sake of this brief I'll be using the term mortgage and home loan interchangeably.

Unless you have enough cash to pay for your home in full you'll need a mortgage. There are many more flavors of mortgage now than there were 20 years ago. To keep it simple I'm going to focus on the most prevalent, fixed rate and adjustable rate. For the vast majority of people fixed rate is the way to go. At the time of this writing Bankrate.com lists rates 5.93%. This is low by historical standards. When rates are low fixed rate mortgages are the best bet. Adjustable rate mortgages make more sense when rates are high but even then its a gamble because you are betting that rates will fall when in fact they may go higher.

The way adjustable rate mortgages (ARMs)work is this: They start out at an artificially low rate, let's say rates are about 6% for a fixed, then you may be able to get an ARM at 5.5%. It really depends on your credit profile and history but that's the simple scenario. After the introductory period the interest rate of your loan will adjust to meet market conditions. If the market has risen and rates are now at 6.7% your rate will go up and hence your house payment will increase.

There are plenty of other mortgage products on the market, like interest only, etc., I won't even try to get into those. Just keep this in mind, exotic home loans often look "cool" because the payments are low but you may owe more on your house at the end of 5 or 10 years than when you started...., not a good scenario.

To get started you'll need to find and meet with a mortgage broker or lender. They will look at your situation and determine what loan amount and rate you'll qualify for. This process is called getting prequalified. If you have made good choices and have good credit you'll have no problem. If you have less than good credit and you may have to do a little "repair" work. I've written a handy little article outlining a plan to boost your credit you can read it here

Copyright 2007 Ron Allen Fayetteville NC real estate all rights reserved

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