"A bank is a place that will lend you money if you can
prove that you don't need it." -Bob Hope
If you were Oprah Winfrey or Bill Gates, you could skip
Chapters 5 and 6, which explain everything that you need to
know about mortgages. If you have enough money to pay cash for
your home, you can happily thumb your nose at bankers and
other mortgage lenders. If you can afford to pay cash for your
home, who needs them?!
As for the rest us, we need to take out a mortgage to buy a
home for the simple reason that doing so is the only way we
can afford a home that meets our needs. This chapter helps all
non-wealthy folk to comprehend mortgages and then choose one.
(If you are wealthy and have a great deal of money to
put into a property, this part of the book can also help you
to decide how much of your loot to put into your home
purchase.)
Start with the basics. What is a mortgage?
A mortgage is nothing more than a loan that you obtain
to close the gap between the cash you have for a down payment
and the purchase price of the home that you're buying. Homes
in your area may cost $70,000, $170,000, or $370,000. No
matter -- most people don't have that kind of spare cash in
their piggy banks.
Mortgages typically require monthly payments to repay your
debt. The mortgage payments are comprised of interest,
which is what the lender charges for use of the money you
borrowed, and principal, which is repayment of the
original amount borrowed.
Learning how to select a mortgage to meet your needs
ensures that you'll be a happy homeowner for years to come.
You also need to understand how to get a good deal when
shopping around for a mortgage because your mortgage is
typically the biggest monthly expense of homeownership (and
perhaps of your entire household budget). Paying more for
interest on your mortgage than you pay for your humble abode
itself is not unusual.
Suppose that you borrow $144,000 (and contribute $36,000
from your savings as the down payment) for the purchase of
your $180,000 dream palace. If you borrow that $144,000 with a
30-year, fixed-rate mortgage at 7 percent, you end up paying a
whopping $200,892 in interest charges alone over the life of
your loan. That $200,892 is not only a great deal of interest
-- it's also more than the purchase price of the home or the
loan amount you originally borrowed!
So that you don't spend any more than you need to on your
mortgage, and so that you get the mortgage that best meets
your needs, the time has come to get on with the task of
understanding the mortgage options out there.
This Homebuyers Tip was excerpted from
Home Buying For Dummies, by Eric Tyson, Ray Brown. © 1997
by Eric Tyson, Ray Brown, used by permission of IDG Books.
ISBN#: 1568843852
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