When purchasing a home, you will also be purchasing a mortgage. Many first time home buyers are unaware of the options they face when shopping for a mortgage. Choosing the wrong one can cost thousands of dollars, so buyers need to beware of the choices they face. Having the right mortgage information ahead of time is critical.
The most common type of home loan is a fixed rate mortgage. This is a loan that carries a fixed rate for a set period of time, otherwise known as the term of the loan. Fixed-rate loans can be held for many different terms, ranging from 15 to 50 years. Over that time, the interest rate, which will be slightly higher than the national interest rate at the time of the home’s purchase, will not change. The only way to change the interest rate is to refinance, which is basically purchasing a new loan.
Another common loan type is an adjustable rate mortgage. In this loan, the buyer receives an interest rate at the outset of the loan. The rate may stay fixed for a period of time, such as three to five years, but after that time it “adjusts” to mirror the national interest rate. In many situations, this means it will go up. Of course, it can go down as well, but these loans almost always end up costing the homeowner more over the life of the loan than a fixed rate mortgage, especially if they are purchased when rates are really low, since the rate is almost guaranteed to go up at some point in the future.
Interest-only mortgages are somewhat deceiving, because they do not work like a traditional mortgage. In this loan structure, the borrower is only required to pay the interest portion of the loan. The only money put towards the principle of the loan is the money the borrower chooses to add to the loan payment, which means there may be months when no money is added to what is actually owed. This can help buyers get into a home when they cannot afford the monthly payment on a traditional loan, but when the loan term is over, the entire principal amount will be due. These loans are usually only available for a short period of time, making them less than ideal for those who plan to stay in their home for a while. Sometimes people who are flipping a property and anticipate making a profit on the resell price can benefit from this loan structure.
The other loans that are out there, such as VA or FHA loans, are variations on these three structures. They have special guidelines and government programs associated with them, but they function as one of these types. Knowing the differences between these three will help you choose the best possible loan for your next home purchase.
