Mortgages are actually a quite old type of lending device, with records showing that the use of a mortgage actually dates back several thousands of years. However, traditionally, the land owner did not have many rights and were not well protected.
One of the biggest differences with older mortgages and newer ones is that during the middle ages, the person holding the mortgage, which was usually a king or land baron, actually owned the land and could do pretty much whatever they wanted with it. Until the person had actually paid off the mortgage, they had, for all intensive purposes, no rights.
This went on for some time, but during the twentieth century, the government began to pass a number of laws, such as the Truth in Lending Act and Fair Credit Reporting Act, which were designed to protect the rights of the homeowner, instead of the lender.
Today, mortgages remain a very popular tool and are often a necessity when it comes to purchasing a home, as most people do not have the money saved up to buy a home.
When purchasing a home, it is important to save up some money for a down payment. For much of the twentieth century, a 20% down-payment had been the standard, with pretty much no banks or mortgage lenders offering a home without at least 20%. Recently, however, lenders have relaxed this requirement and, in fact, leading up to the current financial crisis, lenders had begun to take no down payment at all.
While the no money down mortgage had become very popular, as credit continues to tighten up, most lenders have moved away from this and to a more traditional down payment structure. However, it is still possible to get homes for 10% down and there are still probably some lenders who might even offer no money down loans, but paying a down payment is in the best interests of the homeowner.
The advantage of having a down payment are several fold. For one, it lowers the total price of the home, so the principal of the loan amount is greatly reduced. As a result, a great deal less interest is paid over the course of the loan and the monthly payment is also much lower.
For example, take a home that is $100,000 and financed with a fixed rate mortgage of 4.5% over 30 years. Without a downpayment, the average monthly payment will be $506.69 and over the course of 30 years, $82,406 will be paid as interest. If, on the other hand, you paid a 10% down payment of $10,000, the average monthly payment will be $456.02 and the total interest paid will be 74,166.
As you can see from the above example, by paying even just a 10% down payment, you significantly lower the amount of interest paid on the mortgage, as well as the monthly payment.
Another big benefit of paying a down payment is that you are building equity in your home. Equity is the difference in what the home is worth and how much you owe on the mortgage. Overtime, as you pay off the loan, you build equity, which can be turned into cash when you sell the home or used to borrow against. By paying a down payment, you are instantly putting equity into your home.
About the only person that benefits from a non-money-down mortgage is the lender. In the end, they end up making much more in interest over the course of the home loan.
Purchasing a home is often the biggest investment a person will ever make, so it is not a decision that should be taken lightly. Most people do not have enough money saved up to purchase a home outright, so instead must rely upon a mortgage.
A mortgage is a type of loan, which uses the home as collateral. There are actually quite a few different types of mortgages, but the most common mortgages are Fixed-Rate Mortgages and Adjustable-Rate Mortgages.
The Fixed-Rate-Mortgage is sometimes referred to as a traditional mortgage. Fixed-Rate Mortgages are typically offered for durations of 15 or 30 years, although there are also some less standard durations including 10 and 20 years. Over the entire duration of a fixed rate mortgage, the interest rate does not change, so it is very easy to plan your monthly payments using an amortization table.
An Adjustable Rate Mortgage(ARM,) on the other hand, usually offers a low initial interest rate, but the interest rate is adjusted every few years.
Often, you will see Adjustable Rate Mortgages described using the format 5/1 ARM. The first number represents how often the rate of the ARM Increases. So, in the above example, the interest rate would be adjusted every 5 years. The second number represents the percent at which the interest rate can change, so in the above example, every five years, the interest rate would change by up to 1%.
While in most cases, the interest rate of an ARM will not decrease, it is possible. However, when considering going with an ARM, it is important to plan that the interest rate will increase each time. Another important consideration is what the maximum increase of the interest rate is over the course of the loan. Most lenders will provide a maximum of an 8% or 10% increase over the course of the mortgage, although this varies by lender.
Adjustable Rate Mortgages usually offer a lower initial interest rate, making them appear very attractive. However, as the rate increases, the monthly payment of the mortgage can quickly become very unfordable, so it is important to consider not just the initial rate, but how often the rate increases and what the monthly payment will be when the rate increases.
No matter what type of mortgage you go for, having at least 10% of the homes value for a down payment is very important. Traditionally, lenders had required a 20% down payment, but over the last 20 years, many lenders relaxed this requirement, with some even offering mortgages with 0% down.
However, due to our current economic situation, most lenders are returning to more traditional down payment requirements, so in many cases it will no longer be possible to get a mortgage without a down payment.
While having a down payment may now be a requirement for receiving a mortgage, this is not the only reason to save money for a down payment. This is because by having some money set aside, you will be able to get a lower interest rate and more favorable mortgage terms from your lender. With more options, you will be able to choose your lender, instead of having to go with a subprime mortgage lender. Not only will having money for a down payment mean there will be more options and more favorable terms, but it also means that you will have equity in your home as soon as you move in.