The Beginners Guide to Mortgages

When it comes time to buy a house you will have to acquire a mortgage in New York. That’s just how it goes for most of us. There are several different types of mortgages you can get, and some things you should know about fees and documentation. We will guide you through the process and discuss the basics of how mortgages work.

Points and Fees

bankWhen applying for a mortgage you will be confronted with a lot of paperwork. In the midst of all this paper you will find one important piece of paper that discloses your interest rate, down payment, points/fees, and closing costs. Some of these numbers will be estimates, but generally the numbers are pretty close.

Points – one point equals one percent. This is what a bank charges to do the loan, this is their fee.

Negotiating Fees – you can negotiate fees with the seller. You can ask the seller to pay for most fees with the exception of: Prepaid interest, impound taxes/insurance, and down payment.

Types of Mortgages

Mortgages basically come in two types – fixed rate and adjustable rate. Lets look at the fixed rate first.

15 Year Fixed – the interest rate on a 15 year loan is generally lower compared to a longer term mortgage. If you can afford the higher payments and you plan to stay in the home for a long time, then this loan will save you quite a bit of money in interest over the life of the loan.

30 Year Fixed – this is your typical mortgage that the majority of people get when buying a home. Interest rates are a bit higher than a 15 year fixed, but there is an advantage. The advantage is – lower payments. Here’s one thing to remember: If you have extra money you can add more to your monthly payment (principal) and turn a 30 year fixed into a 15 year mortgage. The times where your monthly budget is tight you can revert back to paying your regular payment…this is the flexibility aspect of this type of loan.

Adjustable Mortgages – these mortgages come in all shapes and sizes. The typical adjustable mortgage goes something like this: The first five years your interest rate is much lower than a 30 year fixed, then year six and beyond your mortgage interest rate will adjust higher. One of the caveats with this loan is what is called “negative amortization.” This means you can owe more than what your originally borrowed after the first five years…this is something to be aware of. On the other hand if you plan to stay in the home for a short time and then sell it, this could be the perfect loan for you.

Prepayment Penalties – less common these days, but still found with some banks. Banks use this to protect themselves from house flippers by adding prepayment penalties clauses in their contracts. Prepayment penalties are not as common these days because banks protect themselves by building protection into the point system. Plus, more and more people are holding onto their homes longer which gives banks time to make a profit on the mortgage.

Once you get approved for a mortgage, then all you’ll need to do next is make the payments and enjoy your new home.