Buying a home is the biggest financial deal many people will ever make. If you're about to buy your first home it pays to learn the ins-and-outs of mortgages. Structuring your mortgage properly can save you thousands or even tens of thousands of dollars over the life of the mortgage. "Mortgages For Dummies" explains how mortgages work and how to get a great deal on your mortgage.
"Mortgages For Dummies" begins by asking the reader to evaluate how large of a mortgage he/she can afford. Tyson and Brown discuss budgeting, which is something many people will already know. The authors point out that in addition to covering your basic expenses, such as food and water, you must also allow for your other financial goals, such as retirement planning. Only through budgeting will you get a handle on how large of a mortgage you really can afford. Obviously, you don't want to wind up with mortgage payments you can't pay!
Lenders have separate evaluations of how much you can afford. Tyson and Brown suggest that lenders will expect your monthly housing expenses and repayment of non-housing debt to total no more than about 36% of your monthly income. And, your total housing expense probably shouldn't exceed 28% of your monthly, pretax income.
Tyson and Brown suggest not making an overly large down payment, "if it depletes your emergency financial cushion." And, don't accept a bigger mortgage than you think you can afford just because the banks say you can afford it!
If possible, you probably want at least a 20% down payment on your home. Lenders borrowing to people with less than 20% equity have found that there is an increased risk of default. Because of this, Tyson and Brown explain new homeowners with less than 20% equity in their homes will need to pay Private Mortgage Insurance (PMI). PMI can cost hundreds of dollars a year. PMI benefits the borrower, not the homeowner. Tyson and Brown suggest that as soon as you have 20% or more equity in your home, you should eliminate PMI.
Another option is to have the government insure or guarantee your loan. Mortgages For DummiesTM mentions FHA, VA, and FmHA government-guaranteed loans.
Chapter 3, Fathoming the Fundamentals, was one of my favorite chapters. The chapter does a good job explaining the secondary loan market and the purpose of the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac).
"Mortgages For Dummies" discusses the difference between conforming and non-conforming mortages. Tyson and Brown write: "This delicious tidbit of information can save you big bucks. Conventional mortgages that fall within Fannie Mae's and Freddie Mac's loan limits are referred to as conforming mortgages. Mortgages that exceed the maximum permissible loan amounts are either called jumbo loans or nonconforming loans. ... You pay dearly for nonconformity."
"Mortgages For Dummies" goes on to give the money-saving tip: "If you find yourself slightly over Fannie Mae's and Freddie Mac's limit, don't despair. You can either buy a slightly less expensive home or increase your cash down payment juuuuuuuust enough to bring your mortgage amount under the conforming loan limit."The "juuuuuuust enough" isn't my typo, although I probably got the number of u's wrong. It's Dummies' humor.
Today, "Mortgages For Dummies" Chapter 9, Refinancing Your Mortgage, will be popular. Tyson and Brown provide an example showing how quickly your refinancing will breakeven. They give us "Refinancing's Magic Formula" to calculate if you should refinance.
"Mortgages For Dummies" doesn't formally introduce the annual percentage rate or APR, and I believe this is a critical oversight. (The book does mention APR in its glossary). So, you might be quoted 7.2% and not realize this rate doesn't take into consideration points and fees you will pay, i.e. it's not the APR. Suppose your current mortgage rate is 8% (APR), you might quickly calculate that you save (neglecting tax effects)8 - 7.2 = 0.8% on the principal loan amount. This would be incorrect, because your actual APR would likely be higher than 7.2% due to the added fees. You really need to distinguish between the fee-inclusive rate and the fee-exclusive rate you might be quoted.
Overall, I think reading "Mortgages For Dummies" is useful for people who are buying their first home or considering refinancing an existing home. Enough dollars at stake that you should pursue all information on the topic and become an informed consumer, even if you need to tolerate some siiiiily jokes.
Peter Hupalo, Author of "Becoming An Investor"
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