A home loan or mortgage is usually the largest purchase that a person makes in his or her lifetime. The monthly mortgage payment is usually the single largest bill that a family has and, on the average, accounts for approximately 35% of the family’s gross monthly income. It may account for more than half of a persons take home pay. Everyone wants to be a homeowner and with good reason. Compared to most things we buy which depreciate over time, home values generally increase as the years go by, making them a sound investment. Experts recommend that consumers educate themselves a little before they take the big step into homeownership.

Before You Do Anything Else

Before you choose a neighborhood, check out the schools, public transportation or any one of a hundred other things that are important considerations for you personally, the very first thing that you should do is obtain a copy of your credit report. Close out any open accounts that you do not use, check for any reporting errors made by creditors and correct all discrepancies. Try to pay off your credit cards before you start saving up for a down payment, particularly if any of them have interest rates that are more than twice the prime rate. Coming up with a substantial down payment is the next step. Most lenders require that borrowers carry private mortgage insurance (PMI) on any home loan that is more than 80% of the purchase price. In other words, if you can not come up with at least 20% of the purchase price as a down payment then you will pay, on the average, an extra $100 per month for this insurance that protects the lender in case you default on the loan. If you do take a home loan with PMI, remember that after you have accumulated enough equity (usually about 20%) you can cancel this insurance, but the lender will not “remind” you. They will just continue to take your money for the full term of the note.

Choosing a Home Loan

A fixed rate mortgage is preferred over an adjustable rate mortgage (ARM) if interest rates are low and you or your financial advisors believe they will go higher. With a fixed rate mortgage, the monthly payment will remain the same for the term of the home loan, which can be from ten to thirty years. In times when interest rates are high, an ARM may be chosen. These loans generally start out with an interest rate that is a little lower than the average fixed rate and then the interest rate is adjusted every year based on prime interest rates or some other market index. People often refinance their homes at a fixed rate when the interest rates reach a desirable low point. These are the two most common home loan types. There are other loans specifically designed for first time home buyers and certain loans that are backed by the federal government, allowing persons who would otherwise be unable to qualify for a mortgage able to obtain a loan. Banks and lending institutions also charge various fees and points and these should be compared before a loan company is chosen.