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LEARN FROM HISTORY: MORTGAGE ADVICE

Not understanding what to look for in a mortgage turns a good idea into a horrible investment.

HISTORY

Since only nobility could legally own land in feudal times, landlords controlled peasants and kept them tied to the land. As society progressed, serfs gained land ownership rights. In order to keep their peasants enslaved, landlords thought of a new idea to maintain control. They became bankers.

For a small down payment, serfs could buy land and pay the remaining amount in monthly installments. This agreement became known as a mortgage, a term that means "until death." Very few peasants owned their land outright, never paying their mortgage, and remained bound to the land and the landlord until death.

Now that you know they exist to bind you until death, here are some mortgage tips to prevent that from happening.

PREPARATION

Experts recommend saving 3-6 months worth of living expenses before buying a home. At the very least, pay off all credit cards and consumer debt, including automobiles.

In addition to financial preparation, a brief education helps. Learn how to read a truth-in-lending statement. This one page document details the important terms of the mortgage.

DOWN PAYMENT

Many lenders entice potential homebuyers by advertising little or no money down. This benefits the lender more than the borrower. Little or no money down allows lenders to charge higher rates and earn more money off the loan.

Required by the lender for borrowers with a loan to value rate greater than 80%, private mortgage insurance adds hundreds of dollars to the monthly payment. A 20% down payment eliminates the need for private mortgage insurance.

RATE

The best borrowers qualify for the best rate. Those with good credit historyon time payments, low debt to income ratio, no defaults or bankruptcieshave leverage when looking for a loan. Find out your credit score and see what you can do to improve it. Paying off high interest credit cards and consumer debt helps. In addition, a credit report alerts you to possible errors in reporting.

Things you can't control factor into interest rates as well. Be sure to shop and compare.

PAYING OFF THE MORTGAGE

Don't be fooled by low monthly payments. Lenders lure potential borrowers with promises of affordability, knowing the low monthly payment will keep the borrower in debt for life. Finding the lowest monthly payment is a foolhardy way of searching for a mortgage.

A fixed rate mortgage with a fixed time periodusually 15 or 30 yearswhen paid off, releases the borrower from the bondage of debt. Making one extra payment per year on a 30-year loan will eliminate seven years of payments, and the difference in payment between a 15 and a 30-year loan is far less than you may think.

Learn more about this author, Trent Lorcher.
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