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The Basics of Buying a House in the U.S.
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The Basics of Buying a House in the U.S.

Home buying in USA At the core of the "American Dream" is having a house, not just a rented house, but one that has been purchased. So people save for a down payment, select a good neighborhood near the best schools, and then choose the perfect home.

That part of the American Dream is great. But once the house has been chosen, home buyers begin to feel the emotional stress that comes with the actual purchase. They start feeling the weight of a $250,000 debt (or more). They wonder if they should select a fixed-rate or variable-rate mortgage. They scramble to find enough money for a down payment. They struggle to find the best lender, and then they have to endure credit checks and figure out how many years to carry the loan. There is a pile of papers to sign, realtors to select, closing costs to pay.

All this has led many people to conclude that the fear of buying a house is as bad the fear of death. A basic understanding of how the system works can help ease the stress of buying a house.

Types of Mortgages

The term mortgage is just a different word for loan. It’s used in the context of buying real estate. There are numerous types of mortgages, however, the two most common types are Adjustable-Rate Mortgages (ARMs) and Fixed-Rate Mortgages. With an ARM, the interest rate on your loan can rise or fall based on economy. A percent for a Fixed mortgage will stay the same for the duration of the loan. Read more here about Mortgage Types.

Down Payments

As with any other loan, the more you have saved and can pay toward your house purchase, the less debt you will assume and the lower your monthly payments will be. Most lenders require a down payment before they will give you a loan. How much of a down payment they require depends on numerous factors which include the type of lender, the size of your loan, the age of the house you hope to buy and the overall U.S. economy. Typically, mortgage lenders require a 20 percent down payment. You can lower that amount if you qualify for mortgage insurance, in which case a second company guarantees your loan if you default. The Federal Housing Administration, an arm of the Department of Housing and Urban Development, also provides mortgage insurance. Your lender or bank can provide more information about mortgage insurance if you are interested.

Mortgage Points

Most mortgage lenders will allow you to pay “discount points” in order to reduce the interest rate on your loan. Paying “points” could save you a lot of money in interest costs, especially if you plan on staying in your house for a long time.

One “point” is usually equal to one percent of your total loan. So if your loan is for $250,000, one point would be worth $2,500. If you choose to pay 10 points in this example, the lender would give you $225,000 but then require you to pay back $250,000. As you can see, the lender would get $25,000 from you. But in exchange, the lender would reduce your interest rate.

The question is whether or not paying points will be cheaper for you in the long run than paying a higher interest rate. You will have to do some careful math to find out. When a fixed-interest mortgage applies, calculating your potential savings will be easier than if you have an ARM.

Usually paying points is worthwhile if you plan on keeping the house more than six or seven years. But some believe that it is better to pay a higher down payment than to pay points. But be sure to compare each option—points or higher interest—before you decide.

Stay Within Your Budget

When interest rates are low and financing is easy to obtain, people are often tempted to buy a bigger house. But it is important to keep your monthly mortgage payments at a level that is truly affordable. The best financial advisors say that your mortgage payment, house insurance and property taxes should not exceed more than about 30 percent of your monthly income. Remember also that homes require frequent maintenance, painting, lawn care, water and electric services and other expenses. It is always wise to prepare a household budget that lists all your expenses. Then figure out how much you can afford to pay on a home loan. Author: Glenn McMahan


 



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The Basics of Buying a House in the U.S.