By Tammy Stoner, FrontDoor.com | Published: 11/01/2007
Other things to know about mortgages:
The only two words that strike more fear into the heart of homeowners than "termite infestation" are our next vocabulary words: prepayment penalty. These penalties for paying off a loan early can be as high as the equivalent of six months' interest on your entire mortgage! It's best to avoid loan offers that include pre-payment penalties when dancing around for mortgages. If that's not possible, negotiate with your broker or lender. Perhaps you can prepay up to 20 percent of the total loan without paying a penalty, or maybe you can arrange to prepay a certain amount annually without penalty.
Private Mortgage Insurance (PMI) is insurance lenders require when a buyer can't pay at least 20 percent of the cost of a home upfront, in the form of a down payment. Why do lenders want 20 percent down? As proof of your financial stability. For buyers who can't cough up that much cash up front, lenders want a PMI policy to cover them if you default on the mortgage. That's right, you buy insurance to protect them from risk. Unfortunately, the PMI premium increases your monthly expenses and make you slightly less desirable to the lender. For this reason, most borrowers try to avoid PMI.There are times when it's wise to make a down payment of smaller than 20 percent and pay for PMI - like if you intend to remodel a house soon after you buy it. If the remodel increases the value of the home, you'll have more equity (cash) in the house. The increased equity could bring you to the magic 20 percent threshold at which the PMI goes away.
It works like this. You buy a cute little Craftsman bungalow for $300,000 with 10 percent (or $30,000) down. You remodel it so that a year later it's worth $330,000, which is $30,000 more than your mortgage (equity). With that additional equity, you now hold 20 percent of the home's value and can have the PMI removed.
Interest rates have crept up, but refinancing may make sense for you.
Purchase price, interest rate, taxes and PMI determine your monthly payment.
Find out if owning a home will save you money.