By Matthew Bisanz

As we look toward May 20th, when many of us will cross that stage in Shuart Stadium and enter the real world, many of us will face the question of where to live. Many of us have lived with our parents or in the dorms for the last four yeas and now, we have a job in a new city where we’ll be on our own. Well if you ask the government, Republican and Democrat alike, they will expound on the benefits of home ownership. Not that it is very hard to buy a home, the real problem is how to keep that home, and why in the world would you buy a home in the first place.

Thanks to government policy over the last half century, there is every motivation to buy a house and to take a mortgage out on that house. While one can’t deduct things like car insurance from income taxes, the interest on one’s mortgage is fair game. So basically, the government is rewarding people for taking on debt, as if there has not been enough motivation over the last couple of years to take on debt.

Once upon a time, the biggest choice a prospective homebuyer had to make was between a 15 year and a 30 year mortgage. Even as recently as 1995 when my parents bought a new house there was no question of what order they would pay the interest and principal in or how many appraisals they wanted to get the “right” valuation. Today those and more questions abound.

The first big choice is an adjustable rate mortgage or a fixed rate mortgage. Ninety-nine times out of a hundred, the adjustable rate will be lower than the fixed rate when you apply for the loan. The reason is it lower is that your really playing a game of blackjack. Your basically betting that the economy will stay the same or get worse than it is when you take out the loan. If that happens, your interest rate will stay the same or go down. However, you’re also betting that this trend will continue for 30 years. If the economy grows, which is usually does, your interest rate will grow with it. And if you are lucky enough to get say a 4% interest rate when you take out the loan, and it grows to 8% because of a better economy, your payments won’t just increase 4%, they’ll increase 100%. So the tale here is that unless you’ve got a tip that Godzilla will be ravaging all the other houses in your town tomorrow, stick with the simple fixed rate mortgage.

Another set of options being offered to potential home buyers deals with when you’ll pay the interest and when you’ll pay the principal of the loan. On one side are what are called interest only mortgages. Basically you only pay the interest on your loan for the first several years and then your principal and interest is paid later. A more traditional form of this type of loan is the balloon payment. Say you take out a $200,000 mortgage. For the first 30 years, you only pay interest on and the principal of $100,000 and then at the end of 30 years, you owe them the additional $100,000 as a single payment.

Still another way companies will try to get you into the house of your dreams is to offer a jumbo or no paperwork mortgage. In a jumbo mortgage, the loan company gives you more money than they normally would or gives you longer to repay it (up to 40 years) and charges you a higher interest rate. A no paperwork mortgage is possibly the weirdest mortgage out there. You go into a bank, tell them how much your worth and how much you make, and they don’t even ask for proof of what your saying. Granted, they charge you a higher interest rate for trusting you, but if they promise they won’t check your background, it a pretty good deal.

Therefore, the lesson of the story here is to choose carefully when deciding how to finance your first house. It will probably be the biggest purchase of your life, bigger even then college (which is pretty big). Read everything and if you aren’t sure, find someone who doesn’t make money off your signature and ask them.