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Learning Center Experience
By Dr. Ana Machuca, Full-Time Faculty Published February 2014
There are many challenges you can encounter when buying a
home for the first time, for example: What type of loan is best for me? How
much down payment should I put down? How much home can I afford? What are
closing costs? And what is included in your monthly payment? In this article we
will address the first two questions in detail and follow up on the remaining questions in our next article.
How much down
payment should I put down?
amount of money to put down depends on your particular situation and the loan chosen.
Some loans require that you pay a higher down payment than others. For example,
you can get into a Federal Housing Administration (FHA) loan for 3–4 percent down,
while a conventional loan usually requires a minimum of 20 percent down. A
couple of items to keep in mind is that if your loan-to-value (LTV) is less
than 80 percent, you will be required to pay something called "private
mortgage insurance (PMI)" as part of your monthly payment until the LTV
reaches 80 percent. My recommendation is that if you have the money available
for a down payment, use it to avoid paying interest in the long run and avoid
paying the PMI. Another option is to get two loans, a conventional loan for 80
percent of the price which will be kept long term, and a shorter term loan
which will be used as their 20 percent down payment. This option is recommended
if you are waiting for money from the sale of another home or another asset.
What type of loan
is best for me?
are several types of loans available to buyers, such as: fixed-rate mortgage,
adjustable rate mortgage (ARM), FHA mortgage, and Veteran's Affair (VA)
fixed-rate mortgage is a mortgage where the rate of interest paid is fixed for
the duration of the loan. These loans come in 10-, 15-, 20-, and 30-year
durations. The shorter the duration of the loan, the higher your payment will
be, but the time to pay off the loan will be shorter and the amount of interest
paid will be less.
is a loan where the interest rate is adjusted throughout the loan period.
People tend to want these types of loan when they want a lower payment now and
do not care if the payment goes up later because they will have a higher income
to pay for the loan. With this type of loan you could afford to buy a higher
priced home now instead of later. But, beware because the interest rate could jump
as much as 2 percent in a given year depending on the stipulations of the loan
and economic conditions.
Mortgage is not a loan but a program sponsored by the federal government to
encourage homeownership. The FHA will provide assurances of payment on your
behalf to lenders that would otherwise not approve you. Meaning that if you do
not pay the loan, FHA will step in and pay it to the lender, but in turn they
will take your house from you. When you have an FHA loan you need to pay PMI as
part of your monthly payment because it is usually less than 80 percent LTV.
That is how the FHA will be covered in the event you default on the loan. The
cost of PMI will vary with the outstanding loan amount each year and is only
payable until the loan reaches 80 percent of value. In some cases with an FHA
loan, your down payment can be a little as 3 percent of the price of the home.
You do have to apply to the government and there are usually some income
mortgage is a loan given to any person and eligible spouses who have ever
served in the military. VA Home Loans are provided by private lenders. VA
guarantees a portion of the loan, enabling the lender to provide you more
favorable terms (http://www.benefits.va.gov/homeloans).
tuned for the next article that will address additional challenges that first
time homebuyers face such as: How much home can I afford? What are closing
costs? What is included in my monthly payment.
Dr. Ana Machucais a full-time faculty member at Kaplan University. The views
expressed in this article are solely those of the author and do not represent
the view of Kaplan University.
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Maylee talks about her experiences with Kaplan Financial Education and preparing for her exams.
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