5 Mortgage Rules You Should Know by Heart

If you’re buying a house or refinancing your loan, here’s what you need to know.

For millions of Americans, a mortgage is the biggest debt they’ll ever have to repay. Unfortunately, as anyone who’s ever gone through the process can attest, mortgages involve pages and pages of legal documentation that can be nearly impossible for most people to comprehend. To simplify mortgages, there are some basic guidelines that anyone can learn and commit to memory. Below, we’ll go through five useful rules about mortgages.

Rule 1: Keep your mortgage payment to 25% or less of your income.

Housing costs are typically the largest expense item in your household budget, but that doesn’t mean you can afford to break the bank. Lenders look closely at your income to determine how much you can truly afford to pay for a monthly mortgage payment, and one simple guideline they use is to take your available income and multiply it by 25%. If a mortgage would require larger payments than that, after taking into account both the loan itself and associated payments like property taxes and insurance, then a lender will generally be less comfortable in giving you the loan.

Rule 2: Avoid private mortgage insurance by making a 20% down payment.

Mortgage lenders typically require borrowers to obtain private mortgage insurance or PMI if they make a down payment that’s less than 20% of the value of the home. PMI protects lenders against the risk that the value of the home will fall below the outstanding principal balance on the mortgage, leaving the borrower “underwater” on the loan. For borrowers, however, it’s an added expense that essentially provides no value to them. As difficult as it can be to save up a 20% down payment, the hundreds of dollars in PMI that it will save you could make the difference between being able to afford a slightly more expensive home and having to settle for less.

Rule 3: Understand how adjustable rate mortgages work and what risks are involved.

Fixed mortgages are easier to understand because the interest rate that they charge never changes, so you can count on monthly mortgage payments remaining constant throughout the lifetime of your loan. That’s not the case with adjustable rate mortgages or ARMs, which only remain fixed for a set period. Most lenders refer to ARMs with two numbers, such as 5/1. The first number refers to how long the initial rate remains in place. The second number describes how often the rate adjusts after the initial rate ends. For a 5/1 ARM, the initial rate stays in place for five years, and then changes every year after that. When rates change, they’ll also change your monthly payment, so make sure you understand the illustrations that your mortgage documents will provide so you don’t get a nasty surprise at the end of the initial term.

Rule 4: Know whether you’ll actually be able to deduct your mortgage expenses.

Many people look forward to being able to deduct mortgage interest, property taxes, and other key expenses of owning a home. But one thing to keep in mind is that all of these tax breaks are only available if you itemize deductions on your tax return. If the cost of your interest and taxes isn’t enough, when combined with other itemized deductions, to exceed the standard deduction you’re entitled to receive, then buying a home won’t do you any good from a tax perspective. That shouldn’t necessarily stop you from making a purchase and taking out a mortgage loan, but it should inform you as to the true cost of doing so.

Rule 5: Be careful diverting retirement money toward a home purchase.

The tax laws governing retirement accounts allow you to make withdrawals from an IRA of up to $10,000 toward a first-time home purchase without having to pay the typical penalties for early withdrawal of your retirement savings. However, just because you can use IRA money toward a home purchase doesn’t mean you should. First, even though you won’t owe penalties, you will owe income tax on the money you withdraw, potentially leaving you with a big tax shortfall at the end of the year. More importantly, diverting that money from your retirement savings will leave you in a less favorable position in the long run with the size of your nest egg. As a potential source of down payment money, tapping an IRA can seem like a smart move, but be aware of the long-term consequences before you pull the trigger.

Buying a home will probably be the biggest purchase you ever make. Being smart about the debt you incur to buy your home is essential to avoid the mistakes that so many homeowners made during the financial crisis. Keeping these rules in mind will take you a long way toward a better understanding of the mortgage process and your mortgage loan.

Source:  http://www.fool.com/investing/2016/05/28/5-mortgage-rules-you-should-know-by-heart.aspx?source=iedfolrf0000001

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1780 S Yellow Brick Road Chino Valley, AZ 86323

$650,000

3 Beds

3 Baths

2,569 SqFt

Status Active

MLS # 6773298

Property Type Single Family Residence

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Fantastic custom built home on 2.61 acres with panoramic mountain views! This 3 bedroom, 3 bathroom also has a den/office area and wonderful back courtyard offering outdoor entertaining space including built-in BBQ and huge views of Granite Mountain. Living room has fireplace and is adjacent to the open kitchen offering granite counter tops, pantry, tile floors, newer appliances and access to back courtyard. The large owners suite offers dual walk in closets, separate his/her vanities, large travertine shower & separate garden tub & private toilet room w/sink. The oversized owners bedroom and access to back courtyard. Spacious 2nd & 3rd bedrooms. 2.61 acres offers plenty of space for barns, arenas, extra garages, workshops, etc. The attached extra deep garage has epoxy floor finish.

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9443 E Riviera Drive Scottsdale, AZ 85260

$650,000

3 Beds

2 Baths

1,484 SqFt

Status Active

MLS # 6773744

Property Type Single Family Residence

Price Type --

This beautifully remodeled end unit patio home features a large private yard perfect for someone looking for low maintenance yet plenty of space and privacy. Updated porcelain and wood plank tile throughout! The well-equipped kitchen boasts stainless steel appliances, ample cabinet storage, double ovens and an induction range, perfect for culinary enthusiasts. The office, complete with built-in bookshelves and a beverage fridge, can easily be converted back into a third bedroom. The primary opens to the backyard, and has dual vanities and two spacious closets with built-in drawers and shelves. Set in a desirable neighborhood, this home backs up to the greenbelt and community pool, one of the best lots in the community. Don't forget about the new AC unit and water softener too!

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2665 E Gillcrest Road Gilbert, AZ 85298

$650,000

3 Beds

2.5 Baths

2,658 SqFt

Status Active

MLS # 6774316

Property Type Single Family Residence

Price Type --

Beautiful 3 bedroom + downstairs office, 2.5 bath home in a great lake community with pool, gym, basketball courts, clubhouse, parks and children's play areas. This home features beautiful granite counters and sleek stainless-steel appliances. The primary bathroom offers a luxurious separate tub and shower and a double sink vanity, and a spacious walk-in closet to fulfill all your storage needs. Freshly painted walls and professionally cleaned carpets. The convenience of this location is unmatched with an elementary school conveniently located within the subdivision, and community amenities.

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8640 W Monaco Boulevard Arizona City, AZ 85123

$650,000

3 Beds

4 Baths

3,536 SqFt

Status Active

MLS # 6773844

Property Type Single Family Residence

Price Type --

Beautiful Custom home w/Casita on the golf course! Enter thru Custom metal door w/Wrought Iron detail into beautiful, tiled courtyard w/gas fireplace. From the private courtyard you have access to a Bonus Room w/mini split, entry to private Casita/Guest House & entrance to main home. Another Custom Door welcomes you into the main living area w/soaring ceilings & gorgeous views of the backyard pool & golf course! Entertainers Dream w/Formal Dining, Great Room w/fireplace, Kitchen, w/gas cooktop, French Door Refrigerator, Butler's Pantry, Wine Rack, & a large Granite Island. Primary suite w/step up Garden Tub, Walk thru Shower, Separate Dual Vanities, & huge walk-in closet. Backyard Oasis w/Covered Patio, Pool, Spa, Outdoor Bath, RV Gate, RV Parking & Hookups. So many features - a must-see!

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15202 N 20th Place Phoenix, AZ 85022

$650,000

3 Beds

2 Baths

1,857 SqFt

Status Active

MLS # 6774457

Property Type Single Family Residence

Price Type --

This tastefully updated home in a well established, non HOA neighborhood featuring a generous owner's suite with enlarged bathroom, walk-in closet, linen storage and direct access to the great back with large covered patio. Enjoy morning coffee and breathtaking sunrise views from the covered front porch or east facing picture window and relax in the evening with a glass of wine on the back patio as the sun sets over your fantastic, low maintenance backyard. Meals are a pleasure to prep in this kitchen with stainless steel appliances, quartz counter tops with direct access from the garage. Clerestory windows and vaulted ceilings flood the home with lots of natural light. Can be available sooner, ask your agent.

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21950 N 100th Avenue Peoria, AZ 85383

$650,000

4 Beds

2 Baths

1,940 SqFt

Status Active

MLS # 6781931

Property Type Single Family Residence

Price Type --

I humbly introduce you to the property that checks all of your boxes. Freshly painted, four bedroom, split floorplan that has not one beautiful kitchen, but two! This property takes indoor-outdoor living to a whole new level. Oversized collapsible slider, custom granite and stone outdoor kitchen, table, private pool, pre-wired surround sound system, and no neighbors behind, puts this home in a league of it's own. This move-in ready property is only missing one thing . . . YOU!

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136 N 11th Avenue Phoenix, AZ 85007

$650,000

5 Beds

4 Baths

1,720 SqFt

Status Active

MLS # 6775519

Property Type Single Family Residence

Price Type --

Versatile property offering a main home and two studio units. Primary home is a charming three bedroom two bath. Two attached studio units located in the back. Main house is month to month lease allowing a perfect owner occupant and investing opportunity. Live in the primary home and allow the two studio units to offset your mortgage by $1,918 per month! Primary unit is currently M2M at $1650. Flexible R-8 Zoning allows for six attached units to be constructed. This block has a great mix of new developments and historic homes. Property is located in the Woodland historic district, a vibrant and evolving area that is walking distance to Historic Grand Avenue, downtown campuses, and all the best dining and nightlife Phoenix offers!

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40568 N Spotted Lane San Tan Valley, AZ 85140

$650,000

4 Beds

3 Baths

2,475 SqFt

Status Active

MLS # 6777852

Property Type Single Family Residence

Price Type --

Entertainers & Car Lovers take notice! Want to know why this home can be better than a new build? Move in ready is one reason, but having the window treatments and landscape completed are the major cost savers here. Plus this location is fantastic. Tucked away in a quaint neighborhood, but with all the new grocery stores and restaurants nearby. Beautiful, upgraded home with wood plank tile throughout. Amazing kitchen with a gas cooktop. Large kitchen island for entertaining, open to DR and family room. The home has solar & energy efficient thermostats. The 5 car garage shows off with an epoxy floor, built-in cabinets, and room for cars & toys. HOA approved RV parking with the RV Gate, Pad, and Hook Up.

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15101 W Waterford Drive Surprise, AZ 85374

$650,000

2 Beds

2.5 Baths

2,406 SqFt

Status Active

MLS # 6778489

Property Type Single Family Residence

Price Type --

Experience resort-style living with this elegant home offering unparalleled views! Nestled on a prime golf course lot in the Sun City Grand community, this immaculate 2 bedroom, 2.5 bathroom home with a den showcases breathtaking panoramic views of the golf course and distant mountains. The open floor plan is designed for both comfort and style, with the outdoors in and a media center wall with a custom fireplace, perfect for cozy gatherings. The dream kitchen is equipped with Corian countertops, mosaic tile backsplash, skylight, and stainless steel appliances. The large primary bedroom has a slider to the patio. Ensuite features double sinks, a jetted tub, and a huge walk-in closet. Secondary bedroom with full private bathroom is perfect for your guests. Outside, relax in your private backyard oasis with a spacious covered patio, a built-in BBQ, cool decking, a custom waterfall, and a serene pond surrounded by a pony wall. The 2-car garage with a separate golf cart garage is finished with epoxy flooring and ample storage cabinets. With access to golf, swimming, and countless recreational amenities, this gorgeous Jasmine model offers the ultimate in retirement luxury.

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34027 N 140th Place Scottsdale, AZ 85262

$650,000

3 Beds

2 Baths

2,000 SqFt

Status Active

MLS # 6778608

Property Type Single Family Residence

Price Type --

Beautiful new home, ready to move into! 3 bedroom, 2 bath, with den or office. Cul-de-sac lot. Large master suite/closet, and all tile master shower. Carpeted bedrooms with upgraded pads. Spacious open floor plan, great room, and kitchen. Quartz countertops, tile backsplash, spacious pantry with built-in-selves. Stainless steel appliances, sit-down kitchen island, and vaulted ceilings. Generous paver stone patio to enjoy desert mountain views. 3-car garage with workspace. Spacious laundry room and storage room, both with cabinets! Solar tube for natural light in laundry room. Long lasting synthetic stucco finish, 2 panel interior doors. Horses OK. Owner Agent.

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7306 E Wilshire Drive Scottsdale, AZ 85257

$650,000

3 Beds

2 Baths

1,506 SqFt

Status Active

MLS # 6778842

Property Type Single Family Residence

Price Type --

Classic 3 bedroom, 2 bathroom brick home, ideally located just off Scottsdale Road and tucked into the center of the highly sought after Scottsdale Estates subdivision. This beauty showcases a spacious living room, formal dining area, updated bathrooms, dual pane windows throughout and a gorgeous backyard with a sparkling diving pool and Trex deck. The backyard also includes a large storage shed, lots of grass for play and a spacious covered patio. The roof and hvac unit were replaced in 2021, complete replacement of sewer lines in 2024, new carpet and fresh interior paint throughout in 2024 and new electrical panel in 2004! Situated close to excelling public and private schools, parks, Old Town Scottsdale, and the 101 freeway, it's in a prime location for convenience and entertainment. This is an extremely rare opportunity that you do not want to miss!

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10116 W Bolivar Drive Sun City, AZ 85351

$650,000

2 Beds

2 Baths

1,800 SqFt

Status Active

MLS # 6780918

Property Type Twin Home

Price Type --

This beautifully remodeled lakefront property offers an idyllic blend of modern elegance and serene living, perfect for those seeking a tranquil retreat. The open floor plan showcases a spacious interior enhance with new flooring and sleek cabinets, while most furnishings and furniture are included for a seamless move-in experience. Indulge in luxury with a jacuzzi tub in the bathroom, providing a spa-like escape, and enjoy the expanded living room, perfect for relaxation with its cozy fireplace. The custom front door and new windows elevate the home's sophistication, and the removal of popcorn ceiling adds to its sleek aesthetic. Entertaining is effortless in the outdoor BBQ area, complete with a covered patio. 2-car garage and office area, property is a blend of style and comfort

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