Buying a home is one of the most important decisions you will have to make in your life. There are many choices an individual will have to make when it comes to financing the home. What kind of loan will they look into? Which one will fit their needs? Which one is perfect for first time buyers? Many questions arise, and I will try and answer some of them.
There are many kinds of home loans and mortgages out there. Find the one that is right for you and one that fits your needs!
Fixed-Rate Mortgages are a kind of loan that has a locked-in rate for the life of the loan. This is the most common one among home buyers. It has many benefits, such as a locked-in rate that protects the borrower from external influences, such as inflation. Since the borrower knows the rate and knows what to expect, it makes it very easy to plan for this type of mortgage. This is the most popular kind of mortgage within the United States since the rate doesn’t float, which means that it doesn’t adjust. The length of this loan is variable, however, one can get a fixed-rate mortgage for 15 years or 30 years (recently, I have even seen 40 or 50 year fixed-rate mortgages as well!) and pay it off, but it really comes down to how much the homeowner has to put down every month. The more money you have available monthly, the more you should reduce your terms. Since you will pay more interest over a 30 year loan in comparison to its 15 year counterpart, there is some incentive to go with the 15 year option. This is the best option for the conservative-minded since it really does protect against inflation. If you can lock in on a good rate (assuming you have good credit!) then this should be the option for you. It will not only be very upfront, but also make sense financially.
Adjustable-Rate Mortgages (ARMs)
Adjustable-rate mortgages are quite different from their fixed-rate counterpart. The interest rate on the loans and monthly payments can (and probably will) change over the life of the loan. This kind of loan is dependent on some sort of an index – such as the 1-year Constant Maturity Treasury Securities or the Cost of Funds Index. This kind of loan takes some of the interest rate risk from the lender, and shifts it towards the borrower. The borrower can benefit, however, if the interest rate falls. There are limitations on the payments (caps), so the borrower will not be forced to pay an unobtainable sum of money monthly. This is used to protect against sudden increases in the interest rates, and solely protects the borrower. Due to their low introductory rates and safety blankets, they have become a wildly popular alternative to the more traditional fixed-rate mortgage. This is a little less conservative then the fixed-rate mortgage, but as you can see, it has its benefits.
This type of loan has spawned from both the traditional fixed-rate mortgage and the adjustable-rate mortgage. It combines the features of both to create a new kind of loan. They typically start off as fixed-rate mortgages, but convert to an adjustable-rate mortgage. This kind of loan can get quite tricky since every lender seems to have different rules behind their hybrid loans. Some have caps at the beginning of the first adjustment, but others don’t. They often times offer a low introductory fixed-rate payment, but later increase to a much higher rate within a few years. You have to make sure you do your research since the introductory rates will seem very attractive to the unskilled eye! If you are looking for a short term loan, this is perfect since you will get the benefits of a low introductory fixed-rate!
FHA doesn’t technically offer loans of any sort, but they help insure the loans from the private lenders. This way, the lenders will have a security blanket from the government in the event that the borrower defaults on the payments due. This is perfect for the first time buyers since the qualifying requirements are quite obtainable. They also offer very little or no down payments, so it is very attractive to even people who never even dreamed of owning their own home! This is perfect for you if you are a first time buyer without a lot of money to put aside for the down payment and closing costs.
These kinds of loans are very similar to FHA Loans except that these loans are sold exclusively to veterans or their spouses. If you fall into either category, you should definitely look into these since they eliminate the down payment a lot of times.
Loans have the power of helping you obtain your dream home. Regardless of which loan you end up using, you have to make sure that you stay within your financial range. It is a very difficult hole to climb out of if you get trapped in a loan that you have trouble making payments for. Just make sure you try and find the loan that works best for you, since you will be stuck with it for many years to come!