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it Pay to Buy a Home or Simply to Rent?
At the start of a mortgage repayment schedule, when the debt hasn't been reduced yet, almost all of your monthly payment goes toward interest. A bit goes toward reducing principal (the amount borrowed), so that the next month you're borrowing a bit less, and owe a little less interest. That allows more of your next payment to go toward reducing principal. However, this process is very slow in the beginning and the interest portion remains high for many years.
Between the mortgage interest and the property tax deductions, you can figure that Uncle Sam is shouldering part of your monthly mortgage payment - 28% of it, in fact, if that's your tax bracket. Your state income tax bracket can also be added to that, before you calculate how much you save on income tax as a homeowner.
Rates and How They Change
Interest rates are usually expressed as an annual percentage of the amount borrowed. If you borrowed $120,000 at 10% interest, you'd owe interest of $12,000 for the first year. With most mortgage plans you'd pay it at the rate of $1,000 a month. You would also send in something each month to reduce the principal debt you owe - and the next month you'd owe a bit less interest.
When your grandparents bought their home (putting at least half the purchase price down, by the way), their interest rate was probably around 4 or 5%. Rates stayed the same for years at a time. Then in the years following World War II, things became more turbulent. As economic changes speeded up, rates began to change several times a year. By the l980s, lenders were setting new rates on mortgage loans as often as once a week - and they still do today. When inflation hit a high in the '80s, some mortgage loans carried interest rates as high as 17% - and those who absolutely needed to buy, paid that much.
Rates dropped gradually through the 1990s, and
by 1998 had reached their lowest rates in decades. Heading
toward the millennium, home buyers appear to have the most
favorable conditions for mortgage borrowing since their
grandparents' days - and without 50% down payments either.
Some closing costs you pay up-front when you apply for a mortgage loan. That includes money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you don't eventually receive the loan, that money is not refundable.
Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but are not limited to:
NOTE: Consider closing
costs when choosing one mortgage plan over another. The
good news is that if your cash is limited, some mortgage plans
allow the seller to pay some or all of your closing costs, such
as title insurance, property tax, appraisal, escrow fees, lender
fees, pre-paids, impounds, home owners insurance, discount and
loan origination points if applicable and points. Certain
closing costs can be built into the purchase price of the home.
of Your Down Payment
How much you'll put down depends on the cash you have available and the amounts you'll need for closing costs and prepaid property taxes and homeowners' insurance.
Mortgage plans have various down payment requirements and they can range from 0% down on a VA - Veterans Administration Loan - to 3% down on a FHA - Federal Housing Administration Loan - 3 to 20% down, the traditional amount for a conventional loan. In addition, special state programs for first-time home buyers may set different sums, which are usually lower than conventional financing.
If you put less than 20% down on most loans, you'll be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This adds approximately an extra half a percent onto the loan.
FHA mortgages, in return for their
low-down-payment requirements, also charge for
mortgage insurance premiums (MIP). All
facts and figures are to be verified by a mortgage professional
Here's how it works: With a 28/33 ratio, you'd
be allowed to spend up to 28% of your gross monthly income for
mortgage payments. The lender will then run a different
calculation. This one is your loan payment and debt payments
combined, which may not exceed 33% of your gross monthly income.
To calculate exactly how much you may borrow, you also need an
estimate of current interest rates.
As part of this calculation, you also need to estimate and include the property taxes, homeowner's insurance, and Homeowner Association fees (if applicable) you might need to pay, which are considered part of your monthly expense.
Begin the home buying process by using our mortgage calculator to determine how much you can afford, or visit a REALTORŪ or mortgage lender and they can analyze it for you.
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