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Pitfalls of purchasing a home/Shorter mortgage terms

January 2018 | Daniel J. DeRosso, Esq.
Purchasing a home for the first time (or any time really) can be a stressful experience. There are the usual worries of finding the right home, getting approved for a mortgage and then having to move. Then, there are the hidden traps that the unwary can fall into.

It is important to know how much you can afford, so make sure to get pre-qualified for a mortgage before doing any house hunting. This way, you know exactly how much of a house you can afford. Remember that banks will pre-approve you for a maximum amount, but this doesn’t mean you have to borrow that amount. It’s certainly wiser to spend a little less and have money remaining for any additional expenses.

Everything involved with owning a home is more costly, from fuel to utilities to any repairs needed. Insurance and taxes always seem to rise, not decrease, and you’ll need the extra money to cover these costs.

It’s a good idea to have a team in place before house hunting. Look for a trusted real estate agent, attorney, lender and engineer ahead of time. Perhaps the most important piece of your team is the attorney, as he or she can provide you with unbiased advice.

Most homebuyers or those refinancing automatically think of taking out the standard 30-year mortgage. While these loans have their place, especially with today’s still historically low interest rates, there are other options.

Two often overlooked loan terms are the 10-year and 15-year mortgage. While the payments on these mortgages may be higher, the loan principal gets paid off that much faster; this can allow a person the opportunity to own their home in half the time or less compared to a traditional 30-year loan. The interest rates for the 10 and 15-year options are also generally a half point to a point lower than for a 30-year loan.

The disadvantages to these options are the aforementioned higher payments along with the loss of the higher home mortgage interest deduction that one would get with the higher interest rate and slower amortization associated with a 30-year loan. One move you could consider is to go for the 30-year loan but amortize it as a 10 or 15-year loan, which involves pre-paying principal. This way, if a financial calamity strikes, you would not be forced to make the higher payments associated with a 10 or 15-year loan.

Please consult your attorney or tax advisor to see which option is best for your situation. And please contact your Legal Service Plan’s National Legal Office if you have any questions about this topic.