Home Mortgages: Think Before You Borrow

Douglas Hanna

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In today's overheated housing market, lenders are making it easier and easier to get a mortgage. For example, some lenders have lowered the credit score needed to qualify for a mortgage. Others have increased the debt load that borrowers can carry or have made it easier for borrowers to get loans while providing little documentation. In some cases, lenders have even made it easier for people to borrow money to buy investment properties.

There are also many kinds of mortgages available today that were never available before. There are interest only mortgages, adjustable rate mortgages (ARMs) for 3,5 or 10 years and adjustable rate mortgages with balloon payments at the end of a five or ten year period.

There are even adjustable rate mortgages that have introductory rates as low as 1% and that give borrowers multiple payment options.

Lenders also used to loan only 80 percent of a home’s value, meaning that the borrower had to come up with 20 percent as a down payment. So, if you wanted to buy a home valued at $150,000, you had to put down at least $30,000. This might have been difficult, but at least you started out with $30,000 in equity in your home.

This standard was then lowered to ten percent, meaning you needed only $15,000 to buy that $150,000 home.

Today, it's possible to find mortgage brokers who will lend 100 percent of the value of a house or even more than 100 percent.

This can be good news for families who, until now, might not have been able to afford a $10,000 or $20,000 down payment. But you need to be careful of. Some unscrupulous lenders may try to sell you a mortgage you can't really afford. Let's say your monthly take home pay (after taxes and other deductions) is $4,000. You find a house for $150,000 and a mortgage broker willing to lend 100% or the full $150,000. A 30-year fixed FHA loan (not including taxes and insurance) will have a monthly payment of about $851.00. The total monthly payment PITI (with taxes and insurance) would most likely be close to $1,000.

A good rule of thumb is that your cost of housing should not exceed 20 percent of your net monthly take home pay (after taxes and other deductions). This means that for a $1,000 monthly mortgage payment, your net monthly income should be at least $5,000. If your income were only $4,000 a month, you would be spending about 25% of your income on housing alone.

Before you make this kind of commitment, you should take a long, hard look at your other commitments, such as car payments, tuition, and insurance to make sure you can cover them as well as your normal living expenses.

Easy, no-down mortgages can be very tempting, but it's important that you understand the exact terms and that you can meet them without stressing your finances.

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