Many mortgage companies will do whatever it takes to get you into the home of your dreams even if the price of that home is probably more than you can actually comfortably afford or your credit rating is not very good. The mortgage industry has many tools or types of loans available to suit the needs of the customer. Those tools are very useful and beneficial if they are used properly and understood by the customer. Although, many in the mortgage industry will use those tools to trap the customer into a mortgage for a dream home that customer should not purchase because they actually cannot afford.
Do not fall into the trap of advertisements showing a very low interest rate. The truth is that only a small percentage of people will actually be able to get that low interest rate because it is only available for people with very good credit. Instead, you will probably receive a rate that is several points higher. The result is that the monthly payment (typically for a 30-year mortgage) will then be much higher than you can afford and your debt-to-income ratio will be out of the normal range of about half your monthly income. Therefore, the mortgage companies will then put you into an Adjustable Rate Mortgage (ARM) with a balloon payment at the end of the term (perhaps 2 to 5 years) without you realizing. The ARM allows for you to have a lower interest rate that will then probably place you into an acceptable debt-to-income ratio showing the perception you can afford the home. If not, then they will put you into an interest only ARM in which your payments will only apply towards interest and none towards principal. The result will be no equity is built up since no money is applied towards paying down the loan amount.
If you are putting less than a 20% down payment, then you will have to pay PMI which can be another high monthly expense. Therefore, the mortgage companies will offer you a first mortgage for 80% of the value of the home and a second mortgage for the remaining amount so you don't have to pay PMI. You will then have two different mortgage payments. A further problem is that since your credit rating may not be good, the second mortgage interest rate will be more than a couple points higher than the first mortgage. What's worse is that the second mortgage could also be an interest only loan. The result is that you are actually in bad financial shape without realizing what just happened.
The mortgage industry tools can be beneficial if you have good credit and you understand the use of those tools because the tools can allow you to make your money work for you better. Although, most people do not understand how the tools work and/or their credit is not very good. The result is that the mortgage companies use the tools to get you into a home you cannot afford. Don't fall into the trap that can lead to financial ruin. Be proactive ensuring your credit rating is very good (at least 700 or higher) or improve it before purchasing a home. Refer to the Credit History/Rating section of the book for more details. Also, understand the type of mortgage you are getting before you sign the paperwork.