NDSU Extension Service - Ramsey County


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Financing a Home

Financing a Home

          Houses have been sold on the installment plan since the days of Julius Caesar – an idea that continues as most of us do not have enough cash for what is usually a family's largest single purchase, We might secure a loan from a bank, savings and loan or credit union. By knowing what to look for and shopping around, you can save thousands of dollars in closing costs and interest payments during the life of your mortgage.

          By definition, a mortgage is a legal instrument that gives the lender conditional title to the property. Mortgage loans allow a lender to sell the borrowed property to pay off the remaining debt if the borrower fails to repay the loan.

          The mortgage that's right for you depends on several variables: how much money you need to borrow, your stage in life, how long you will be in the house, what your budget will allow, what your housing priorities are, whether you like to take risks, and how much you are willing to pay (in cash) for all the fees, assessments, processing charges and up-front interest costs when you sit down at the closing table to sign the papers.

          One rule of thumb states that your house payment, with taxes and insurance, should not exceed 25 percent to 28 percent of your gross monthly income (or income before taxes and other deductions), and that all debt should not exceed 36 percent of gross monthly income. These percentages may vary with guidelines established by various banks and the federal government (for federally insured loans).

          Loans vary by the different terms or conditions of the loan. An interest rate “lock-in” mortgage might be for you if you expect interest rates to rise between the time you apply for the loan and your actual closing date. The lock-in is a lender's promise to hold a certain interest rate (and possible points) for a specified period of time. Often you are charged for the lock-in or an extension of a traditional lock-in.

          The term is the life or length of the loan, usually 15 to 30 years. Fifteen-year and 20-year loans are becoming increasingly common and are popular for refinanced loans. While payments are higher, interest rates usually are lower and you save much money in interest costs. The most common choice is the 30-year mortgage, although the average American moves every
nine years.

          The added principal payment is not really an interest rate option, but a recommended strategy for you to pay your loan off early and save interest charges. Your lender may allow you to make additional payments toward the principal of your loan on a monthly or other basis. This results in paying off the principal early, thus saving much in interest costs.

          For more info on choosing a lender, recommendations on size of mortgage fits your income and tips on refinancing, check out the NDSU Extension publication, “Shopping For a New or Reduced-term Mortgage” at : http://www.ag.ndsu.edu/pubs/yf/fammgmt/fe242w.htm or follow the QR code pictured below.



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