Process of Buying a Home

Very few things in life are quite as exciting as buying your first home. It's part of the American dream. And although home prices keep rising, ownership is within the realm of possibility, even for those who don't make enormous salaries. Of course, the larger your down payment, the lower your monthly payments will be. The purchase of a home is probably the largest monetary transaction in the life of the American consumer.

Owning a home is one of the most important financial goals for most families. The American consumer usually goes through three steps when buying a home. Step 1: Locating a desirable home and negotiating for the purchase. This step includes the preparation of and agreement to the contract in which the price and terms of sale are included. Step 2: Arranging for a loan, usually from a savings and loan association, a commercial bank, a mortgage company, an insurance company, relatives, or friends. An application is completed, the home is appraised, the buyer's credit is checked, and the loan is approved or denied. Step 3: Closing the sale, usually with the help of the real estate agent involved and the lawyers representing the seller and the buyer.

There are a lot of different ways a home may be financed. For instance, the prospective home buyer will approach a lender and ask for a mortgage loan. If the loan application is approved, the borrower will sign a mortgage note agreeing to repay the full amount to the lender over a period of time with interest. A mortgage is "a temporary, conditional pledge of property to a creditor as security for performance of an obligation or repayment of a debt, a contract or deed specifying the terms of a mortgage." (www.yourdictionary.com) Or in English, it's a debt secured by real estate. A first mortgage, which arises with the initial purchase of real property, provides the lender with the first claim on the value of the real estate in the event the borrower defaults on the loan and cannot pay. A foreclosure is a "legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. The foreclosure procedure brings the rights of all parties to a conclusion and passes the title in the mortgaged property to either the holder of the mortgage or a third party who may purchase the realty at the foreclosure sale, free of all encumbrances affecting the property subsequent to the mortgage." (www.buyersresouce.com)

There are a lot of different types of mortgage loans out today. A couple of the most common ones are fixed-rate mortgage and adjustable rate mortgage (ARM). A fixed-rate mortgage "guarantees a specific rate of interest for the life of the loan" (www.remortgage-advice.com) The loan is secured by real estate that carries a predetermined, fixed rate of interest for the term of the repayment period. The borrower, may obtain a $100,000 loan with a thirty year repayment period and a locked in interest rate of seven percent. The monthly payment of $665.30 will not vary and will be divided each month to pay the interest on the loan and to reduce the principal owed. In the early months of a mortgage loan, nearly all of the payment goes toward the payment of interest. The advantages of the fixed-rate mortgages are that they are easy to understand and they help the borrower plan for the future since the payment is predetermined and will not change. The disadvantages are that these mortgages may carry highest interest rates than other types of mortgages, and if interest rates in general decline after the borrower obtains a fixed-rate mortgage, the locked-in rate may be a problem. Of course the borrower may always refinance.

An adjustable rate mortgage (ARM) is a real estate loan that provides periodic adjustments in the interest rate during the repayment period. Adjustable rate mortgages are often more difficult to understand since the mortgage contracts include a variety of provisions related to the size and timing of the interest rate fluctuations. "The most popular intermediate adjustable rate mortgage loans are the 3/1, 5/1, 7/1 and 10/1. These loans are normally amortized over thirty years with the interest rate initially fixed for three, five, seven and ten years respectively. After the initial fixed period, these loans typically adjust annually." (www.homebuyersbeware.com) Intermediate adjustable rate mortgages are very popular with borrowers who want the stability of a fixed rate and the benefit of a lower introductory rate. If you plan to sell or refinance your home in three to ten years, you may want to consider an intermediate adjustable rate mortgage loan rather than a fixed-rate mortgage. You can save money with the lower introductory rate, but you risk having a higher rate if you are still in your home or haven't refinanced when the introductory rate period expires and the rate starts adjusting toward market levels.

Below are examples of how the mortgage rates have changed over the past twenty years.

The key features of an adjustable rate mortgage are initial interest rate, base interest rate, adjustment period, monthly payment cap, and lifetime interest rate cap. The initial interest rate is the beginning interest rate for the loan which is usually used as a marketing device to attract borrowers. It is generally very low and will be in effect only until the first adjustment in the mortgage rate takes place. Borrowers are often interested in these lower interest rates because the lower initial mortgage payments help them qualify for larger loans and more expensive homes. Base interest rate, sometimes called contract rate, is the interest rate that the various caps are figured on and is generally the sum of the index and the margin rate at the time the loan is applied for. Adjustment period describes how often the interest rate on the mortgage will be adjusted. It might be adjusted every six months, once a year or some combination of periods such as locked in for the first three years, and then adjusted annually. The monthly payment cap is the limit on the annual increase in monthly payments. For example "the mortgage contract may provide that payments cannot increase more than one percent in any given year." (www.homebuyersbeware.com) The lifetime interest rate cap is an adjustable rate mortgage clause that will limit the total increase during the lifetime of the mortgage and will define a maximum interest rate.

Mortgage lenders have frequently charged "points." This is vitally important to understanding mortgage lending operations. "When you pay "points," you pay interest in a lump sum upfront to get a