• Home
  • About
  • Advertise
  • Contact
  • Policy
  • Guest Post
  • Archive

One Cent At A Time

A Personal finance blog to get rich

  • Email
  • Facebook
  • Pinterest
  • RSS
  • Twitter
  • Beautiful Life
  • Becoming Rich
  • Beginners Guide
  • Extra Income
  • Productivity
  • Saving Money

Assess your Borrowing Power First Before Mortgage

December 21, 2012 3 Comments

Share this:

  • Tweet
  • Email

The following is a guest post by Betsy Falwell, a good followup after last week’s post 6 financial must do’s for first time home buyer.

Mortgage Loan

“…and it will only cost us $750 a month!” exclaimed the too-loud woman in front of me at Starbucks. We were both waiting for our beverages – me a non-fat, no-water chai tea latte; her some frothy type of seasonal drink – and it was impossible for me not to overhear the conversation she was having about her new home loan with the person on the other end of her cell phone.

I’ve been there. When I was a first home buyer, I was so excited about getting into a house of my very own that I wanted to shout it from the rooftops, if not in line at Starbucks. But I couldn’t help but wonder whether the gregarious woman had done all her homework while shopping for that home loan.

Not All Home Loans Are Created Equal

Home loans come in a variety of shapes and sizes – and, maybe most importantly to a first home buyer – interest rates. Here’s a basic breakdown:

  • Fixed-rate home loans: When you sign on for a fixed-rate mortgage, you’re securing an interest rate for the life of the loan. Whether the market surges or crumbles, your rate is secure – as are your monthly payments. The main variation here is the length of the term. While you’ll find fixed-rate loans with terms as long as 40 years or as short as 10 years, in general, the longer the term, the higher the interest rate.
  • Adjustable-rate mortgages: Usually called an “ARM” for short, this type of loan promises one interest rate for the first several years of your loan; after that introductory period, the interest rate can fluctuate depending on market conditions. Again, the term is a big deal; a 3/1 ARM means the introductory period lasts three years, while a 10/1 ARM’s intro period is a decade. The shorter the introductory period, in general, the lower the interest rate during that time.
  • Interest-only loans: This loan keeps costs low by allowing you only to pay interest on your loan for a set period of time, while the principle balance remains unchanged. After an introductory period – usually between five and ten years – you’ll have to start paying down that balance, though. The result is lower payments up front, and far higher payments later on.

Calculating Your Income

Think your income is the amount of money your employer deposits in your account every other Friday? Think again. When it comes to calculating your income for mortgage purposes, lenders actually give your bottom line a boost. What lenders want to know when it comes to asking “how much can I borrow?” is your gross monthly income; that’s your income before taxes, medical insurance premiums, or 401(k) contributions.

If you’re a traditional employee who receives a W-2, you’ll find this information in Box 3 of your W-2. If you’re self-employed or receive a 1099 form, calculating your gross income is a little more complicated. In this case, your lender may give you credit for more than the income stated on your 1099 if you claimed work-related deductions on your tax returns.

A Lot Depends On Your Down Payment

Of course, the type of home loan you choose and the all-important term isn’t the only major factor for first home buyers. Your down payment will also play a big role in your monthly mortgage payments.

Back in the days before the housing crisis, lenders peddled zero-money down loans without any type of income verification, putting borrowers at risk of default. Well, we all know what happened next. These days, most banks want to see you put down at least 20 percent on a property; if you don’t, you’ll face private mortgage insurance, which can add several hundred dollars a month to your payments.

Is The Cheapest Loan Always The Best?

In a word, no. Let’s consider a 30-year fixed-rate home loan, a 5/1 ARM, and an interest-only loan with a 10-year introductory period. You can use mortgage calculators to compare the options for your specific financial situation, but in general:

  • The 30-year fixed-rate mortgage will give you the highest monthly payments for the first five years, compared to the other two options.
  • The 5/1 ARM will have the second highest monthly payments; after those five years, though, your costs could go higher or lower – it’s a borrower’s gamble.
  • The interest-only loan will have the lowest payments for that first decade. After that, though, the principle balance is amortized for the remaining time left on the term. At this point, your payments will likely be far higher than the 30-year fixed.

Overall, the 30-year fixed may not get you the lowest monthly costs, but it will get you stable, predictable payments over the long run. That’s why this is one of the most popular home loans out there.

LIKE THIS POST?
I agree to have my personal information transfered to MailChimp ( more information )
Join our community of 8000+ subscribers to increase your net worth and build wealth
We hate spam. Your email address will not be sold or shared with anyone else.

Share this:

  • Tweet
  • Email
The tool that changed the way I manage my personal finance - Personal Capital, The Best Free Personal Finance Tool

Want to start a WordPress blog now? The onecentatatime.com blog is hosted by Siteground Web Hosting. For only $3.95 a month, Siteground can help you set up and host your website/blog quickly and easily.

About the Blogger Hi I am SB, a personal finance enthusiast with a career in software development. I am an immigrant to the USA since 2005, after being born and brought up in India. This 40 something technocrat lives and breathes personal finance whenever he gets time from the day job, job as a husband and a dad

Some links on this page may be affiliate links, if you make a purchase following the links, I may earn a commission. Read affiliate disclosure here
« The Weekend Made Cheap – How to Spend Weekends Frugally
10 Ways to increase your self-esteem »

Comments

  1. The College Investor says

    December 21, 2012 at 11:02 AM

    good stuff! It is always better to assess your financial standing before making any loans and it is very important to know some info on your mortgage options.

    Reply
  2. Felix Lee says

    December 22, 2012 at 1:44 PM

    This is plenty of information about house loans. It’s good to know what my options are when I’m considering getting a loan. This just shows there’s a lot to think about before plunging into just any type of loan. Thank you for the informative article.

    Reply
  3. Manette @ Barbara Friedberg Personal Finance says

    December 25, 2012 at 9:31 PM

    Very interesting for families like us who are planning to purchase our next home. We have been saved more than enough for the required 20% down payment. We have decided to go for a fixed interest mortgage and pay additional 30% on the down payment, if we are not doing any major repair on the house.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.



Create your own blog in 20 minutes and $20

Personal Capital, a free tool to change your financial health today

I use and suggest Upstart, for your personal loan need

CreditKarma, a free tool to check your credit scorey

I use Coinbase, for my crypto investments

101 Cents at a Time

101 Ways to Earn Extra Money on the Side
201 Frugal and Perfect Birthday Gifts
101 Ways to Save Money Everyday
101 Ways to be Better and Successful at Work
101 Ways to Save Environment and Energy
101 Frugal and Romantic Anniversary Ideas
101 Low-Cost Men's Fashion Ideas
101 Personal Finance Tips
101 Ways to Reuse Household Stuff
101 Things to Do, When Nothing to Do
101 College Graduation Gift Ideas
100 Tips for Ecommerce Startup
101 Ways to Enjoy Indoor During Winter
101 Ways to Beat Procrastination

Popular Posts

Quick Cash - How to make $100 legally, in a day
Living well on less than $15,000 a Year
Top survey sites for side income
What to do when auto repair goes wrong
Where should I invest my money now?
20 Ways to be productive and happy at work
51 Ways to get out of debt
Be a better person in 15 days, 15 ways
Income ideas for retirees and senior citizens
51 side jobs for college students
Urgently need a large amount of money?
Should I buy or should I rent?
Best Personal loan providers
25 Ways to save environment
25 DIY car repairs to save money
How to decorate office cubicle
How to show your wife you care
50 Financial Rules for Success
51 Frugal weekend family activity ideas
Become Rich By Saving 1 Hour Of Daily Wage
How much do I need to save for retirement?
How to negotiate your salary

Follow us on FaceBook

About Author

SB

Blogger by choice and IT manager by profession. Finance is my passion and gardening is my greatest satisfaction. Born in India, settled in US, Husband and a father. I created this blog in 2011 with a vision to help others. Thanks for your patronage. More info on my "about" page.

View all posts


Subscribe

Join our community of 5000+ subscribers to increase net worth and build wealth

Advertisements

Personal Stories

How I got a new HP computer replaced
Was COVID circulating in USA in fall of 2019?
How my credit score went up 800+
Why I didn’t invest in Bitcoins
How I controlled impulses to buy things
Why this blog is named One Cent at a Time

Subscribe via Email

Site Disclaimer

Disclosure of Material Connection: Some of the links in this web site are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”
Read full Affiliate disclosure


One Cent at a Time is published by SB. The opinions expressed herein by him are his own and not those of his employer or anyone else. All content on One Cent at a Time is for entertainment purposes only. By reading this blog, you agree that SB and/or One Cent at a Time is not responsible for any actions taken after reading this blog. For the full disclaimer, click here .

Major Media Mention

One Cent at a Time Media Appearances

Copyright © 2023 One Cent At A Time · Designed by Nuts and Bolts Media