FINANCING YOUR FIRST HOME
Financing your first home can be the most frustrating part of the home buying process. This is the time when you will figure out how to pay for the home. Most people take out a mortgage loan to finance the home.
You will have many questions about financing your first home. Which mortgage loans are right for you, How much of a down payment will be necessary, What is escrow,
By knowing the facts, paying attention to interest rates, and looking at all your mortgage options, you will be able to choose repayment terms that will fit your current income and allow you to safely make those monthly payments.
Types of Home Loans
Deciding which home loan is the right one for you will depend on what you qualify for and what your lender is willing to give you. There are a few types of mortgage loans, including:
* First-time homebuyer loans
* Fixed rate mortgage loans
* Adjustable rate mortgage loans
* Balloon mortgages
* Jumbo loans
You should be familiar with these loans so that you will be able to make an informed decision when it comes to financing your new home.
First-Time Homebuyer Loans
Many banks and financial institutions have programs specifically for first time homebuyers buy a home. These often include options for low down payments and longer repayment terms, such as 30 years.
Fixed Rate Mortgage Loans
For first time home buyers on a strict budget, choosing a fixed rate mortgage may be the loan for you. Your monthly payment will never change for the life of the loan because you will lock into the interest rate given at the time the loan was processed. You can take out loans that range from ten to thirty years.
There are many advantages to taking out mortgage loans that have fixed rates. You will be able to create a monthly budget for yourself, you will never be surprised by the amount you will have to pay each month, and you will be able to lock into a low interest rate.
The disadvantages may not mean much to you now, but as your family or your income grows, you may want to refinance to pay less each month to be able to afford renovations, vacations, and other luxuries. Since your mortgage is fixed, if interest rates drop, you will be trapped paying a higher rate. While you can refinance your mortgage, you will have to wait a certain amount of time, and you could incur closing costs.
For those who have limited income, lower credit scores, or want the security of paying the same amount each month, then a fixed rate mortgage is the loan for you.
Adjustable Rate Mortgage Loans
An adjustable rate mortgage offers interest rates below the current market interest rate for at least the first three, five, or seven years. This type of mortgage is beneficial for a buyer who expects their income to increase in the next few years, does not plan to live in the home long term, or can pay off the loan before the new interest rate is applied.
After a predetermined period of time, the initial interest rate will be adjusted. Depending on current interest rates, your monthly payment will increase or decrease. Most adjustable rate mortgages cannot be raised more than two interest points per year, and up to seven points for the life of the loan.
Balloon Mortgages
Balloon loans have a short loan period, usually between five and ten years. At the end of that time, you are required to either pay off the balance due or refinance. If a lender offers you a balloon loan, they are obligated to offer you a loan to pay off the balance at the end of the term, but you are not required to use the same lender.
If you are only planning on living in your first home for a few years (five to seven), you should consider a balloon mortgage. These mortgages offer lower payments at a competitive interest rate that is fixed.
Closely consider the risks associated with a balloon loan. Will you be able to pay a higher payment when you refinance at the end of the loan term, If your credit worsens, will you qualify for a new loan,
Jumbo Loans
Most first time homebuyers will not need to take out a jumbo loan unless they are buying a very large home. These loans are used to purchase land and homes valued over $275,000. More collateral will be needed to qualify for this type of loans. The interest rates are comparable to fixed and adjustable rate mortgages, and have the same payment terms.
Now that you know about the types of mortgages that are available, you should be thinking about which lender to use. With so many lenders out there, it may be difficult to sort through all of them and find the right one. Doing a little homework will help you get the lowest interest rate possible.