Money Sense Tips

There are different types of mortgages available in the industry. Do you know what are they and which one is suitable for you? Here are the explanation of the different kinds of mortgages:

1. Fixed rate mortgage – This is a mortgage where monthly payments remain the same throughout the entire term of the loan.

Note that there are two types of fixed rate mortgages: 15-year and 30-year. The benefits of both are described by Bankrate in this way:

“With 30-year loans, borrowers generally get lower monthly payments even though their rates are higher. That’s because the longer amortization schedule spreads the additional cost of the rate differential – which was roughly 30 basis points in mid-September – over twice as much time. People can buy larger houses or keep their payments on smaller homes affordable as a result.

Fifteen-year mortgages, on the other hand, help buyers own their homes sooner. Even though their payments are larger, they build equity faster because more of each payment goes toward principal rather than interest. The lower interest rate and shortened term make the loans cheaper by lowering the overall interest bill.”

2. Adjustable rate mortgage (ARM) – Unlike the fixed rate mortgage, the ARM rate changes based on the market.

3. Balloon mortgage – According to Bankrate, a balloon mortgage has a “payment schedule similar to that of a thirty year fixed rate loan, although the term of the balloon loan is shorter, most often spanning five to seven years. At the end of the loan term, the outstanding balance must be paid in one lump sum, either out of pocket or by refinancing the home.”

4. Interest only mortgage – In this case, the homeowner is allowed to pay only the interest for a specific period of time on the loan before the principal is paid. After the time has expired, the payments increase to include the principal. Note that this may not be a prudent way of paying a mortgage since higher payments overall will arise.

Given the fact that banks are still not lending, acquiring a mortgage that is right for you may be a daunting task.

Great tip: Try to stay away from predatory lenders who offer you a mortgage that seems too good to be true. Research many qualified and certified lenders to compare and contrast the different mortgage types before you sign on the dotted line.

Budgeting takes a concerted effort. The first time that you put one together it will take a few hours to account for everything, but that is just the learning curve. Once you have the system set up, it is easier to make any changes down the line. Here are some tips for building a budget.

Account for all of your income. Include all the regular monthly jobs that you receive a paycheck from. Even if more of your income goes to pay the bills, include both incomes in the household. Single parents that receive alimony or child support payments from a former spouse can include this as a part of the regular earnings for the month.

What are your expenses? The usual expenses include rent/mortgage, car payment, insurance, utilities, and credit cards. We all have other expenses that we can think of and those are included when you calculate how much you spend.

The budget is taking shape. When you add up the expenses and subtract them from the earnings, there will be a positive or negative number at the end of that equation. A positive number is good. It doesn’t mean that you don’t need a budget, but it is a clear sign that you are already making progress in the right direction.

A negative number means that you are living beyond your means. This doesn’t include any impulse spending, unless that is why you have credit card bills. A negative means that you have to find a way to cut spending and bring more money into the house.

Examine those credit card bills. For one thing, the interest rates on those things are outrageous. Leaving a balance at the end of each month is a costly thing to do. The finance charges and interest compounded daily will kill you if you ever fall behind on a payment.

If you are using the credit cards to pay for necessary items like groceries, car repairs, and unexpected bills, consider adding an emergency fund category to your budget. This is a place to keep money to use in the event of an emergency. An emergency fund keeps the budget going despite a need for cash.

Treat the emergency fund like another savings account or investment. Make allowances for contributing money to each of these. For a regular savings account, that means money that will be shifted to investment vehicles like IRAs and CDs when the amount reaches a certain limit. The emergency fund money is at your disposal should anyone need it.

Once all numbers are plugged in and you’ve set up spending limits for categories, it is time to put the budget in place. If you have to, withdraw cash from the bank and put it into separate envelopes that represent each category. When the money in the envelope is gone, so is the spending for that category.

Budgets are not set in stone. As you go from month to month, have a review to change amounts as needed. If you have set aside even five or ten dollars each month, that is five or ten dollars more than the previous month. Success can come in small steps.

To learn how work a budget for yourself, check out this book to help yourself The Budget Kit: The Common Cents Money Management Workbook