Buying a home is a big step, and it comes with a serious financial commitment. When you purchase a house, unless you have the cash to pay for it, you'll finance it with a mortgage. The bank that makes the loan will charge you fees for their service plus interest on the amount of money you borrow. Because there are many aspects to home ownership, with a little knowledge, you can enjoy the benefits and avoid the pitfalls.
Amortization
A mortgage is a combination of the price of the home plus the interest the bank charges for lending you the money. The bank uses amortization, a method of calculating interest each year on the remaining amount of money you owe. Although your monthly payment may remain the same, in the beginning, more of it may go to interest than principal. However, after a few years, more of your payment will go toward your home value and less will go to interest.
Interest Rates
Interest rates fluctuate constantly, but once you apply for the mortgage, your rate will remain the same until your loan closes. Interest rates are negotiable, and they will vary from bank to bank. Other factors affecting your mortgage interest rate are your credit score and the type of mortgage you choose. You will have a lower initial rate on an adjustable rate mortgage (ARM), but it may increase after a few years. A fixed rate mortgage keeps the same rate for the duration of the loan.
Benefits
Home ownership comes with financial benefits. Your monthly payments will help you build equity in your home, resulting in greater net worth. In addition, the interest portion of your monthly mortgage payment is deductible on your income taxes. Your property taxes are also deductible. After a few years, your value in your home will increase and your bank may allow you to borrow against this value with a home equity loan.
Potential
Home ownership offers the potential to build an investment that you can use later to purchase a more expensive home or for retirement. For most individuals, a home is their largest purchase, and while it comes with a long-term commitment, it also acts as a savings plan.
Considerations
Your bank may require a down payment before they will issue a mortgage for your home. Once you buy a home, you must make your mortgage payments every month or the bank may foreclose on your home. If you purchase your house when home values are high and then they drop, you may be "upside down" in your mortgage, owing more than your home is worth. Once you own a home, you must pay for upkeep and repairs to maintain your home's value.
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