Taking out a mortgage loan is a serious thing – it means that you’re making a 15 or even 30 year commitment to a bank and promising to pay them an extraordinary amount of money over that time period. And yet many people not only find that this commitment suits them, but they are actually willing to assume a loan’s debt and payments as part of a property acquisition. If you find yourself thinking about a loan assumption, you had better be sure it’s the right decision.

But how can you be sure? Well, you don’t pack for vacation without at least having a mental checklist of everything you need to bring. Similarly, it’s not a good idea to assume a loan unless you’ve got a checklist prepared beforehand. Here are some of the items you might want to make sure are actually included in that checklist:

• An agreeable interest rate. One of the reasons some people are willing to assume a loan is because the loan was made at a time when interest rates were lower – in essence, they can acquire a mortgage on a house for better payments. This is generally good during specific economic times – i.e. when mortgage rates are higher. Generally, a low market interest rate means that you’ll hear about fewer and fewer loan assumptions. But no matter what the economic climate suggests, you need to make sure that the interest rate is something that you’ll be able to pay off. The better the interest rate, the better your reason for getting into the mortgage in the first place.
• Know what the balance on the loan says about your prospects.Of course, a major remaining balance on the loan will mean that you’re taking on a larger and larger commitment – not only of time but of money as the interest accrues over the years. If you don’t understand how the balance remaining on a mortgage will affect the loan you’re considering assuming, then you don’t want to pull the trigger. You absolutely have to know the impact that the balance remaining on the mortgage will have on the entire loan itself. The older the loan, the more you’re going to have to pay off, of course – but also the more interest will accrue on the account. You need to be fully aware of all liabilities before you assume a new loan.
• Know why the other party’s getting out of the loan. Sure, some people are getting out of loans simply because they’re in dire straits and they’d otherwise love to stay in. But if someone else is abandoning a loan, you need to ask yourself why – and if that reason might also apply to you once you acquire the loan. Are there hidden dangers with the property itself? Is it a money pit in some way? Does it need additional investment beyond the loan assumption? The more you know, the better you’ll be able to arm yourself against any obstacles that come your way.

Most people don’t have much money to put toward down payment costs for a home. There are possible solutions to a common cash problem:

• Co-Borrower: Income or additional funds from a spouse may provide additional funds to support the down payment costs. You may also want to consider whether a roommate or co-dweller may relieve the financial burden by assisting you with your down payment.

• Gifts: Monetary gifts from family members can support your down payment requirements since no funds repayment is required.

• Inheritance/Trust Funds: Inherited money from family members or a trust fund are also acceptable sources of down payment since no funds repayment is required.

• Borrowing/Loan: Monetary support from friends or relatives are a solution.

• Retirement Funds: Some retirement funds like the 401K plans may allow you to borrow a certain percentage from your retirement fund. You should check with your local lenders to see if they allow home buyers to borrow against their retirement funds. Note: Borrowing against your 401K plan requires that you repay the amount; therefore, when lenders calculate your loan qualifications, they will add your 401K repayments in calculating your monthly payments.

• Down Payment Assistance Programs: There are also programs and organizations that can help you with your down payment requirements, such as:

- Federal Government Loan Programs: Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA) may offer assistance in paying your up-front cash requirements. These programs can significantly reduce your down payment requirements. You may also want to contact your local Department of Housing and Urban Development (HUD) Community Builders to find out what local down payment assistance programs are available.

- State Housing Authorities: State agencies may offer down payment assistance programs in your state.

- Private Mortgage Insurance: Private insurance companies that offer you opportunity to finance some of your down payment requirements. This allows lenders to accept lower down payments than they would normally allow.

While these two mortgage types start the home buyer off at one rate and increase the rate over time, one of these types of mortgages may be right for you:

Buydowns: This is a type of mortgage loan where the loan rate is reduced by paying more up-front at closing and is increased by one percent each year for the period set for the type of loan. For example: For a 2-1 buydown at an 8 percent rate, Year 1 the rate is 6 percent, Year 2 the rate is 7 percent. For Year 3 through the life of the loan, the rate is 8 percent. Qualification rules for the loan programs remain the same. Depending on the lender, though, the buyer can qualify using the reduced rate. (Example: For a 3-2-1 Buydown at a rate of 8 percent, the buyer could qualify using the 5 percent rate.) The difference between the actual payment schedule and the rate schedule is usually paid “up-front” at closing. This can be paid by the seller, the buyer, the home builder, or in some cases, the lender. If the cost is borne by the lender, it is usually offset with increased rates or in points. Generally the funds used to buy down the loan are held in a separate account and are applied with the borrower’s payment to equal the true interest rate.

Graduated Payment Mortgage (GPM): This is a type of mortgage loan where the mortgage payments increase gradually for a period established in the loan paper- work, typically five years. This is a negatively amortizing loan, which means that the difference between the interest paid and the interest due is deferred and added to the loan balances. Because of this, your loan amount will increase once you start paying off the loan; it will amortize normally at the end of the loan period. These types of loans are more popular when the interest rates are higher, providing a financial incentive for potential buyers. Since many lenders will qualify a buyer at a lower rate, a buyer can secure a larger mortgage. These loan types are good for those buyers who are fairly certain that their incomes will increase to cover the increase in loan amount. **

Generally speaking, a mortgage is a loan obtained to purchase real estate. The “mort- gage” itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest. Principal is the amount of money that you have actually borrowed and interest is the amount of money that the lender will charge you for the privilege of borrowing the principal amount of the loan. There are many types of mortgages, and the more you know about them before you start, the better.

Most people use a fixed-rate mortgage. In a fixed-rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it. Another kind of mortgage is an Adjustable Rate Mortgage (ARM). With this kind of mortgage, your interest rate and monthly payments usually start lower than those for a fixed rate mortgage. But your rate and payment can change either up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower. There are several government mortgage programs that might interest you, too. Most people have heard of FHA mortgages. FHA doesn’t actually make loans. Instead, it insures loans so that if buyers default for some reason, the lenders will get their money. This encourages lenders to give mortgages to people who might not otherwise qualify for a loan.

The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner’s insurance, and mortgage insurance (if applicable). The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment. A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate “lock-in” which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan. If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate two (2) percent less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees that you paid at the original closing, plus origination and application fees.

Most loans have four parts:

• Principal: The repayment of the amount you actually borrowed

• Interest: Payment to the lender for the money you’ve borrowed

• Homeowners Insurance: A monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders

• Property Taxes: The annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year.

Most loans are for 30 years, although 15-year loans are available, too. During the life of the loan, you’ll pay far more in interest than you will in principal – sometimes two or three times more. Because of the way loans are structured, in the first years you’ll be paying mostly interest in your monthly payments. In the final years, you’ll be paying mostly principal.**