Financing your home purchase is the most important part of buying a home. The mortgage you decide on will influence your financial life for many years to come. Before looking into your mortgaging options, assess your finances. How much can you put down as a deposit? How much can you afford to pay monthly? Take into consideration job stability, taxes, insurance, and utilities. Work with your agent to make sure you are taking a realistic approach toward your finances. Once you know your budget, it’s time to decide on a mortgage that works with you. Below are 6 common mortgage plans for homebuyers.
1. Fixed Rate Mortgage
This mortgage is the most popular among homebuyers because of its predictability. You have the option of 10-, 15-, 20-, or 30-year fixed rate mortgages, and sometimes even longer, with 30 years being the most common time frame. A fixed rate mortgage is ideal for homebuyers with unchanging incomes. This mortgage can become frustrating when interest drop lower than the fixed rate but can feel very gratifying when they spike higher than the fixed rate.
2. Federal Housing Administration Loan
Commonly known as an FHA loan, this mortgage option is ideal for first time homebuyers because it only requires a 3.5% down payment. The loan is insured through mortgage insurance by the government and is therefore the application is more forgiving of past credit mistakes than other mortgage options. Most people will qualify for this loan. The only downside of the loan is that it is not very attractive to sellers because of the low down payment.
3. Adjustable Rate Mortgage (ARM)
As the name states, the interest rate of this loan adjusts over time. The initial interest rate is lower than a fixed-rate loan until the first adjustment, which could be anywhere from six months to five years.The newly adjusted rates will reflect the current economic trends; sometimes the adjusted rate will be lower than your current rate and sometimes it will be higher. Most ARMs put a cap on how high the adjusted rate can go over the initial interest rate at each adjustment and for the life of the loan. You will find that this loan type has many options regarding starting interest rates, adjustment schedules, and length of the loan.
4. Balloon Payment
Although this loan is perfect for some homebuyers, it can be very dangerous for those not prepared for the financial impact. Everything is calculated for this loan the same as a 30 year fixed loan but monthly payments are only made for several years. Once the years specified by the agreement are over, the outstanding balance is due in full.
5. Interest Only Loan
For a homebuyer that needs more money right now but will soon be able to invest much more into a home, this loan is the perfect option. For the beginning of the loan, the borrower only pays the interest on the principal balance, initially lowering monthly payments. Once this option expires according to what is stated in the loan agreement. Paying only the interest doesn’t build equity. But, interest only option will expire and then the monthly payments of interest and principal amount will build equity.
You may find that one of these mortgaging options is the perfect fit for you. But, if you don’t you have many other options. Don’t limit yourself only to loans you’ve heard of. Talk to your lender about custom mortgages or if you may qualify for one of these special mortgage options:
- Jumbo Mortgage (loans over $415,000)
- Veteran’s Administration Loan (veterans only)
- Reverse Mortgage (over 62 years old only)
- Rural Development Mortgage Guarantee Program
If you are ready to buy a home, team up with a First Team agent to make sure you know what your mortgaging options are and have your finances properly lined up. Once you’ve accurately organized your financial life, consulted a lender about mortgages that are right for you, it’s time to get prequalified and start home hunting.