means. But others will and may not properly take into account your
ability to repay should loan terms or your financial circumstances
change.
For instance, if you are considering an interest-only mortgage, the
lender may qualify you based on your ability to make those interest
payments without considering the fact that later on in the loan term
you will have to pay down principal as well. Lenders offer a variety
of products that can make it much easier for you to get a house that
would otherwise be unaffordable. As with any mortgage, these products
are appropriate for some and not others. An interest-only loan may be
beneficial to you if you plan to own the house for a short term. If,
however, you plan to stay long term, you need to be able to continue
to pay your mortgage when the loan resets at a new rate and your
monthly payments increase. A soft second or piggyback loan (a mortgage
taken to cover your down payment), or private mortgage insurance (PMI)
may save you from making a down payment on the house at closing
(traditionally 20 percent of the cost). But that means you are
starting out with little or no equity in your home.
To obtain your dream house, be sure to understand the risks associated
with mortgage products. First and foremost, be sure you can repay the
debt. For the unwary borrower, the dream can turn to a financial
nightmare if the product is inappropriate or too risky.
It is important, therefore, that you do your homework: Evaluate your
financial circumstances to determine what you can and cannot afford
before you agree to a mortgage.
Consider the following:
• Think about how long you plan to stay in the house: is this a long-
or short-term investment?
• Do you anticipate any changes in your compensation?
• If you plan to stay long term, will you be able to cover changes in
your monthly payment and thereby avoid foreclosure or financial
disaster?
What you should ask the lender:
• Given my circumstances, is this loan suitable for me?
• If you are considering a piggyback loan (a simultaneous second loan)
because you cannot afford to put a down payment on your dream house,
ask, What will cost me more — a piggyback loan or PMI?
• Will I qualify for PMI?
Terms you should know:
Debt-to-Income Ratio (DTI)
Loan-to-Value Ratio (LTV)
Private Mortgage Insurance (PMI)
Simultaneous Second Lien Loan (Piggyback)
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