Homeownership 101

Housing is a commodity like no other. We depend on it for a number of needs - physical, financial, and emotional. Our houses and apartments provide us with shelter, safety, stability, and help tie us to the communities in which we live. Housing is one of the most expensive needs we must meet, and unlike other commodities, our homes are fixed in place. As homes are tied to place, the symbolic and financial value of a home is inherently tied to the perceived quality of its surroundings. Likewise, the perceived quality of the housing and those that live in it determine the perceived quality of a neighborhood.

Housing can be owned, leased, rented or mortgaged. It can be a source of income for some and a drain on financial resources for others. For homeowners, the house is usually one's most significant financial asset and represents one's greatest financial liability when mortgaged. Owners can spend 30 years or more paying for their homes. Despite these risks, homeownership is the means by which many American families accumulate wealth.

Housing not only has an economic impact on its inhabitants, but also is vital to our nation's economy. Not only do housing-related construction industries help drive the economy, but housing finance supports our banking system. The significance of a stable housing market to our economic health is one reason why federal, state and local governments heavily subsidize homeownership, through income tax deductions, the insuring of mortgages, and direct subsidies and other incentives. Housing also provides most local governments with their main revenue stream- property taxes. Housing is a strong indicator of local, regional, and national economic health.

"Some newspaper ads for home loans show surprisingly low rates. Are these loans for real, or is there a catch?"

Some of the ads you see are for adjustable rate mortgages (ARMs). These loans may have low rates for a short time--maybe only for the first year. After that, the rates can be adjusted on a regular basis. This means that the interest rate and the amount of the monthly payment can go up or down.

With an adjustable-rate mortgage, your future monthly payment is uncertain. Some types of ARMs put a ceiling on your payment increase or rate increase from one period to the next. Virtually all must put a ceiling on interest-rate increases over the life of the loan.

"Is an ARM the right type of loan for me?"

That depends on your financial situation and the terms of the ARM. ARMs carry risks in periods of rising interest rates, but can be cheaper over a longer term if interest rates decline. You will be able to answer the question better once you understand more about adjustable-rate mortgages. This booklet should help.

Shopping for a mortgage used to be a relatively simple process. Most home mortgage loans had interest rates that did not change over the life of the loan. Choosing among these fixed-rate mortgage loans meant comparing interest rates, monthly payments, fees, prepayment penalties, and due-on-sale clauses.

Today, many loans have interest rates (and monthly payments) that can change from time to time. To compare one ARM with another or with a fixed-rate mortgage, you need to know about indexes, margins, discounts, caps, negative amortization, and convertibility. You need to consider the maximum amount your monthly payment could increase. Most important, you need to compare what might happen to your mortgage costs with your future ability to pay.

This booklet explains how ARMs work and some of the risks and advantages to borrowers that ARMs introduce. It discusses features that can help reduce the risks and gives some pointers about advertising and other ways you can get information from lenders. Important ARM terms are defined in a glossary on page 19. And a checklist at the end of the booklet should help you ask lenders the right questions and figure out whether an ARM is right for you. Asking lenders to fill out the checklist is a good way to get the information you need to compare mortgages.