At MintLife we strive to make complex financial topics easy-to-understand. Most homeowners are already familiar with the concept of a mortgage. A Reverse Mortgage lets you borrow money against the value of your home without your needing to pay it back until either one of two things happen; either you die or you sell the home. With recent government regulations in place, the Reverse Mortgage is a financial instrument set to explode with the wave of retiring baby boomers. These mortgages not only affect the borrower, but their heirs as well, so it’s important to understand the ins and outs of process and product. The Reverse Mortgage can be a lifesaver for some, but is not for everyone. This factsheet will show you how it works.

Provided by Reverse Mortgage Guide

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If you’re a first-time home buyer you might be interested to know that Dan Marino’s 10-bedroom, 12-bathroom mansion in Weston, Florida, is up for sale for $13.5 million. Marino originally listed the home in 2006 for $15.9 million, but recently decided to make his offer more enticing by cutting the price and throwing in some designer furniture and an autographed football.

If those new incentives get you excited, you need to stop and take a breath. Would you really be induced to spend $13.5 million on a house only because the seller throws in an autographed football? After all, you can get one on eBay for less than $100. For $13.5 million, Marino should come back once a year and hold a football camp for your son. He should be the guest of honor at an annual barbecue with you and your friends where you can all stare wide-eyed while he tells war stories from the NFL — and then make fun of him after he leaves for never winning a Super Bowl.

Honestly, if you’re a first-time home buyer, you would do well to not get too starry-eyed at the prospect of sitting in your living room gazing at a Dan Marino football on your mantelpiece wondering how you’re going to make the next $85,000 mortgage payment.

Here are some other common mistakes people make when they decide to take the leap from renting to owning.

Falling in love with perks that don’t add value

The Marino football is just one, unique example. Some people fall in love with a built-in swimming pool. (Marino’s house is loaded with them by the way.) What a lot of people don’t know is that a swimming pool is expensive to maintain and it may cause your homeowner’s premiums to go up. (Insurance companies call it an “attractive nuisance.”) Also, when you go to sell your home, many people will avoid homes that have swimming pools or ask that, as a contingency for sale, the pool be filled in.

So when you’re shopping, don’t get too attached to the house with the sinking foundation next to the freeway just because it has got a wet bar and pool table in the basement. If you need any perks, add them later to a house that is a better value.

Failing to budget for all those things that will break down

When home repairs need to be done, a renter picks up the phone and calls the landlord. When repairs need to be done and you’re the owner of the home, you’re on the hook. You are the one who has to replace the hot water heater when it busts open like a water balloon. You are the one who has to change the filter in your central air unit, make sure the gutters are cleaned out and replace broken appliances. You’ve got to buy a lawn mower, a snow shovel and salt when it snows. All of these things cost money — and they add up (big time).

Foreclosures are happening everywhere today because people borrowed the absolute maximum they qualified for so they could get into the biggest house they saw. They could barely afford their mortgage payments and that left no money to do repairs or even routine maintenance.

Your best bet is to buy a little bit less house than you can afford. That will leave money in your budget for maintenance and any other surprises that come up; then you can focus on funding your savings account so that in a few years you can do renovations (kitchen, bathroom) that will increase the value of your home.

Overestimating the tax savings

You may have heard that a lot of European millionaires live in Monaco because the principality has no income tax, whereas countries such as Great Britain have nothing but income tax. A lot of people look to buy homes because they think the tax deduction they’ll receive will turn out to be a similar tax haven for them.

It is true that you get a tax deduction on the interest you pay on your mortgage; but remember, when you are a renter you don’t have a mortgage so you don’t pay interest on a gigantic loan. That’s what a mortgage is: The biggest loan you’re ever going to take on in your life.

Getting a tax deduction on the interest you pay on a mortgage makes the interest a little more affordable, but it’s still not better than paying no interest at all. If you don’t believe us, we’ll make a deal with you: You pay our mortgages every month and we’ll write you a check for the tax savings at the end of the year.

Everybody hates paying taxes, but some people don’t have a really big tax burden. If you have a couple of kids and your household income is less than $100,000 per year, then you don’t pay a lot in federal income taxes. The tax savings on a mortgage wouldn’t really be all that great.

That’s not to say there aren’t any compelling reasons to buy your own home; but don’t fool yourself into thinking the tax savings are going to be a windfall for you. Read our article on the home buyer tax credit.

Not researching the neighborhood

“Hell is other people,” said the existentialist philosopher Jean-Paul Sartre — and sometimes they live next door.

Try to do all the due diligence you can on your new house. Check out the school districts (even if you don’t have kids, the quality of schools in the area will affect the resale value of your home), get a home inspection done and ask people you know about the neighborhood. Still, there’s one thing you might not really know until you’ve been in the house for a few years: That’s the painful idiosyncrasies of the freaks that live on either side of you.

Sure, renters have neighbors too, but if the situation becomes too painful they can get up and move when their lease is up at the end of the year. You can’t just turn around and flip that house when your neighbor takes to doing part-time auto body work in his front yard.

When you buy a house, you’re also buying a whole neighborhood. Ask the mailman if you have to, but try to find out as much about the people who live around you before you move in.

Overestimating your enthusiasm for renovations

A little “TLC” said the listing. It’s awaiting your special designer’s touch, your creative flair. You can paint the walls any color you like. You can put in permanent fixtures. You can build a patio, a deck and remodel a bathroom if you like.

Unfortunately, in a lot of cases you have to do those things. The linoleum in the kitchen floor is a fake brick pattern and 30 years ago some teenage boy epoxied a Fonzie poster to the wall in his bedroom. The realtor can call it any thing she wants, but most people call it what it is: work. Owning a home that needs a lot of updating is like having a part-time job that you don’t get paid for.

It’s great if you have experience doing those things or if you like that kind of work. But if neither of the above is true, then you’re going to need to budget a lot more time into doing the simplest of chores than you think. It’s going to be learning on the job. You’re going to be chasing guys with orange aprons up and down the aisles at Home Depot.

If that’s your idea of fun, then buy the fixer-upper. If not, you might want to consider a townhouse or a home that’s been built in the last 10 years.

Do your homework

This isn’t to say that you should be afraid to buy a home — just do it with your eyes open. Owning a home can be personally and financially rewarding over the long term. But in recent years a lot of people didn’t educate themselves beforehand and our whole economy is paying for it today.

After all, you don’t want to be stuck in a few years trying to unload a house that nobody wants — like poor Dan Marino.

First-Time Home Buyer Mistakes Provided by AskMen.

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Despite the struggle, most responsible homeowners don’t think twice about whether they should make the mortgage payment each month. You’ve worked like crazy to stay on top of bills for years. You may have already fought your way back from bad credit and don’t want to let your credit score sink again. Whether you choose to fight and stay in your home for the long-haul, or you have given it your all and just can’t bear the crushing weight anymore, it’s important to know that there are better options than simply abandoning your home before you are late on the payments.

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As the stigma associated with losing a home has subsided considerably in the past year, more people are creating their own economic stimulus package. Why refinance (if you have equity) or pay the guy who wrote your original mortgage to take a shot at a loan modification, when you can just take the “Free Housing For Six Months Package” and simply stop mailing payments to the lender? Many people are exacting their revenge on the lenders who put them into the time-bomb loans, and some are not only getting even with the bank financially through withholding payments but are gutting and destroying the home on the way out.

Should we seek first to be ethical in this situation despite what others are doing, or should we do what is best in the near-term (and perhaps even the long-term) for our own families first? This presents a real dilemma for us, because we have always placed so much value on fulfilling our obligations, yet more and more people feel like their lenders betrayed them first. So, having done your best, what can you do to feel like you have done your best ethically to stay in the home, while also making a tough decision that could make your financial turn-around come sooner?

We Are Current, But The Payments Are Killing Us

First, the quickest call is to find out if you can refinance (which you probably already tried) which will be made tougher by the loss of income. There are many debt consolidation and loan modification companies springing up, and you might recognize the voice of the guy on the other end of the phone – it’s the guy who put you into your negatively amortizing pay option hybrid wacky funzone ARM! That’s right, the former loan officer who loved you enough to give you a three year prepayment penalty that you couldn’t afford to get out of two years ago when you had equity and could still qualify for a new loan, if it weren’t for that $15,000 charge to get out of the old loan! If you aren’t getting anywhere with your lender, it is definitely possible to find reputable loan modification companies, but first look for a personal recommendation and compare pricing with a few different companies.

We Just Went Late On the Mortgage – Should We Catch Up?

There is at least some consolation in the decision-making process here, in the sense that you (unfortunately) have already taken a hit to your credit score, yet this now allows you to make some firm choices without clinging to your FICO score for dear life. At this point, or even if you just have a maxed-out credit card or a late payment on your car, your credit is too low to get any traditional financing, so don’t waste time trying to refinance or get loans or credit lines. At this point, find a local real estate agent who knows your neighborhood (the man or woman whose sign you are sick of seeing everywhere is a good place to start). If you owe more than the property is worth, it is very important that you choose a real estate agent who has experience with short sales.

There is nothing to lose at this point in putting your home on the market, and you should call your lender to get information from the loan reconciliation department and start pulling together your financials – most recent paystubs, bank statements, two years worth of tax returns and the most important piece, a well-written hardship letter that explains what has changed in your situation. The decision to catch up on a late payment or two is personal and obviously based on a lot of unique variables, but one thing to keep in mind is that borrowing money from friends or family to stay current may just delay the inevitable and most likely could cause strain on the relationship down the road. If it feels like it is impossible to catch up without continuing to borrow, you could potentially be moving in the next six months or sooner, and it is a good idea to keep in mind moving costs, deposit and first month’s rent and start planning to get back on your feet.

What is the Government Really Doing to Help?

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On December 15th, a very extensive loan modification effort (which has been marked with some controversy) backed by the government goes into effect. If you are able to document the financial events that caused you to fall behind (essentially to prove that you didn’t stop paying the mortgage on purpose) and qualify for the modified loan payment, you have a strong shot at staying in your home.  Find out if your lender is part of the Hope Now Alliance and most importantly, no matter how bad your situation is, do not ignore your lender’s phone calls or letters, and stay in touch with them, because the sooner you begin working with them, the better your chances of finding some resolution that will allow you to recover much sooner than walking away. Remember, you can get back on your feet again no matter how far down you fall.

Budget planning is something that we care about here at Mint. Learn more with great budget planning tips in our blog article index.

What are the benefits of using fixed-rate mortgage in purchasing or refinancing your home? If you are in an adjustable-rate loan, should you consider refinancing and getting out of it while you still can or buckling down and budgeting your money before interest rates get too high and home values drop?

There’s no simple answer to that question, since so much depends on your specific home, loan, and personal financial situation. But you’ll also find that, depending on your state or county, a different type of mortgage is appropriate for you. Sound confusing? It shouldn’t be: simply put, areas with home values that are increasing (and where interest rates are low) often choose to have adjustable-rate mortgages on their properties. On the flip side, many U.S. homeowners find a fixed-rate loan to be safer and less dependent on market conditions. It also provides people with security and a sense of self-confidence in their ability to meet financial obligations.

While an adjustable-rate mortgage (ARM) might work for you if you fully understand the terms and conditions, you have to work on budgeting your money. By their nature, in an ARM, interest rate will increase or decrease – and you should be prepared. In recent years, the interest rate has risen steadily, causing many homeowners with adjustable-rate loans to see rising costs in month-to-month payments.

An ARM is a gamble – you’re gambling that the interest rate will decrease and home values will increase. If you happen to be wrong, you could face an insurmountable monthly payment and a decreased home value.

On the other hand, you could look into a fixed-interest mortgage. As you look into the best home loan option, here are three advantages of fixed-rate mortgages to consider:

• Decreased risk. Your month-to-month mortgage payments are fixed. Even if the current interest rate increases, yours will stay put, which is an essential point of security for many homeowners. This is one reason why fixed-rate mortgages are popular, particularly with first-time home buyers.
• Secure long-term planning. Since your monthly mortgage payments won’t change, you have the security of planning out your payments throughout the life of the loan. You can carefully plan for things like property taxes and insurance, and it also allows you to be financially responsible in planning out your family’s future.
• Budgeting your money. For the most part, we can’t predict the ebb and flow of interest rates. Inflation may cause interest rates to rise, which would cause you a great deal of trouble with an adjustable-rate loan. With your fixed-rate loan, though, you can ride out the storm at ease. Your mortgage rates will stay the same, even if your taxes and insurance costs rise.

Fixed-rate mortgages have been a secure way for home owners to purchase homes for decades. Over the years, loan-to-value ratios have fluctuated and interest rates have moved up and down, but the security that a fixed-rate mortgage offers has never lost its appeal to homeowners throughout the U.S.

Fixed-rate mortgages may have a timeline between 10-50 years, but a 30 year amortization period is most common. People often choose a 30 year loan, because it often gives you a reasonable monthly payment to shell out. Rising home costs, though, have increased the number of 40- and 50-year loans being accepted. While that may be a good move to make the month-to-month mortgage payments reasonable, it does increase the amount of interest on the loan by stretching those interest payments over a much longer period of time – with a 50-year loan, almost twice the amount!

Understanding closing costs. Also known as settlement costs, closing costs are fees and expenses over and above the price of the property, incurred by the buyer and/or the seller in the property ownership transfer.

During the early years of a fixed-interest mortgage loan, much of your monthly payment goes toward eliminating the interest. As the loan progresses, though, that will change: slowly but surely, most of your payments will go towards that principal, such that by the end of your loan almost all of your money will go towards principal payments.

This type of fixed-interest payment plan means that it will be harder to sell your home during the first few years. Very little of the principal will have been paid off, so the loan will still be high. If the house did not appreciate in value, the financial situation gets difficult. However, if home values are increasing, then it will be a significantly smaller problem that so much of the principal has yet to be paid.

As the homeowner, you have some choices with this, too: making a larger monthly payment and directing more of it towards budgeting your money will decrease your principal loan balance faster, and decrease the amount of interest that’s left over. Say, for example, that you paid half of your monthly mortgage every two weeks; that would pay off your mortgage about 5.25 years faster than scheduled. Paying one extra payment per year would reduce the amortization period by 5.25 years, as well. Options like these aren’t requirements, but they do shorten your payment periods significantly.

Another factor to a mortgage loan is the “point” system. Points will decrease your interest rate if you pay an additional fee – about 1% of your loan for each point. Depending on your circumstances, it could be a good idea to invest in points, but you’ll want to calculate your overall savings before you start buying them. To recover the cost of those points, you’ll want to figure out your monthly savings with the lower interest rate versus the rate without points. Divide that number into your points to arrive at the number of months it will take you to break even. Beyond that, all of your savings are yours to keep.

To give an example of that, if you decide to pay for 2 points on a $300,000 loan (for an interest rate of 5% rather than 7%), your payment will be $1610.46. However, stuck with the 7% interest rate, you’re left with the payment of $1995.91. The difference between the two payments is $385.45.

Two points will cost $4,000. To recoup that investment, $4,000 divided by $385.45 equals almost 10.4 months. By your 11th month, not even one year of payment, you will begin to profit from paying those points with a personal budget planner.

Hopefully it’s become clear now that your choices involved in a fixed-interest rate mortgage loan can be extremely beneficial to your personal financial situation. There are many ways that you can decrease the term of the loan or the overall interest rates of the loan. With smart financial planning, you can be through that loan and into financial freedom quickly.

Further Reading on the Topic:

Personal Budget Planner

Budgeting Your Money

Home Budget