Understand the Mechanics of a Mortgage before You Borrow

By Richard Barrington
NFNS Columnist

It is often said that the typical American's largest asset is the family home. That being the case, it also follows that a mortgage is the largest piece of debt the average American is likely to incur. This shouldn't scare you away from taking out a mortgage, but it does mean there are some things you should understand before you sign up for that home loan.

Key Characteristics of a Mortgage
Here are some key characteristics of mortgages and what they mean to you:

  • Home loans use your house as collateral, so don't rely on any generalities about how much of a home loan people say you can afford--make sure the projected payments fit your budget with room to spare.
  • When choosing between an adjustable-rate and a fixed-rate mortgage, don't be seduced by a low short-term "teaser rate" rate on an adjustable-rate mortgage. A mortgage is a long-term commitment--typically about 5 years but possibly as long as 30 years. One year's interest rate should not have an undue influence on your decision.
  • Mortgage rates can be highly unstable. They change from week to week and these changes can be drastic. This is another thing to understand about adjustable rate mortgages, but it also means you shouldn't hesitate too long if rates are favorable when you are shopping for a home. Don't count on those rates staying in place for long.
  • The ability to refinance is a key advantage. You can choose a fixed-rate mortgage and still refinance to capture lower rates if they fall drastically. You also should keep refinance strategies in mind if you ever have trouble meeting your mortgage payments.

Responsibility and Rewards

Taking out a home loan is a serious responsibility which requires that you understand how that loan is going to work. In return, successfully paying off a mortgage is one of the most satisfying financial accomplishments you are likely to experience in your lifetime.

About the Author:
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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