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Introduction: Mortgage Basics

What is the largest purchase that you will make during your lifetime? It's your home, right? Wrong, it's your mortgage! If you buy a $225,000 home financed with a $25,000 down payment and a $200,000 mortgage at 7 percent interest for 30 years, you will pay $279,000 in interest over the life of the loan. That's more than the purchase price of the home.

Most people do not consider obtaining a mortgage the same as choosing and buying a product. Nevertheless, a mortgage is a product like any other, and as with other products it pays to be a smart consumer. By shopping around and knowing what you are shopping for, you can save thousands of dollars, whether it is for your first home or your umpteenth. Saving 0.5 percent on the interest rate of a $200,000 mortgage lowers your payments by $800 a year and saves you $24,400 in interest over 30 years.

Making you a smart consumer is the whole point of this book. It tells you what you need to know when shopping for your mortgage.

What This Book Covers

The Mortgage Kit is strictly a consumer's guide and covers what consumers should know. It is not for people w ho work in the mortgage industry and need more in-depth knowledge of the topics discussed, although it may be a useful overview of the mortgage process for real estate agents and those just entering the business. It does not cover the history of mortgage lending or the arcane mathematics that underlie mortgages. Time is valuable, so to the extent possible, the sixth edition of The Mortgage Kit is short and to the point.

Chapter 1 explains the application process. Getting a mortgage is complicated, often taking one or more months. Knowing what information your lender needs can help you shorten that time and eliminate much of the frustration surrounding the process.

Chapter 2 tells you what a lender looks at before deciding whether or not to make a loan. It answers the questions “How large a loan can I get?” and “What can I do to help myself qualify for a mortgage?”

Chapter 3 is written for (the almost half of all) mortgage applicants whose employment history, income, savings, or property they are financing does not fit the national standards imposed by mortgage lenders. It describes in some detail how you can build your case to obtain a favorable consideration on your loan application.

The various types of mortgages available today, including fixed and adjustable rates, level and graduated payments, FHA, VA, and conventional loans are discussed in Chapter 4. Different types of mortgages satisfy different consumer needs – lower rates, easier qualifying, faster payoff, lower down payment, and lower initial monthly payments. This chapter helps you pick the right type of mortgage for your needs.

Chapter 5 reveals how to save money by shopping. You should expect to save at least $1,000 by shopping, but you must know what to look for and what to look out for. This chapter also helps simplify and organize your shopping efforts.

Chapter 6 covers several topics that do not fit neatly into any other chapter but need to be covered to make this guide complete. These include:

1. Assumability

2. Buydowns

3. Late payment charges

4. Mortgage insurance

5. Internet lending

6. New developments in mortgage lending

7. Prepayment penalties

8. Second mortgages

9. Tax deduction

Anyone getting a mortgage on a small residential property bought as an investment rather than as a residence will find Chapter 7 helpful. It covers the additional qualification and documentation required for loans on investment properties (but not the advisability of making such an investment).

Chapter 8 is about refinancing. It helps you figure out whether you should refinance your existing mortgage, how much you would save if you did, and how much it would cost. It also offers some tips on how to reduce your refinancing costs.

The rest of this introduction is devoted to five topics that are basic to understanding mortgage:

1. What is real estate?

2. What is a mortgage?

3. Mortgage pricing

4. Loan-to-value ratio

5. Monthly payments

 
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