Introduction to Mortgage Types
If you’re a first-time homebuyer, the lending process can seem quite complicated. You may find yourself overwhelmed with new terminology, paperwork, state and federal regulations, and required documentation. A good place to begin your journey is with an understanding of the three basic kinds of mortgage loans.
With a fixed-rate mortgage, the interest rate remains the same throughout the full term of the loan. This means that your mortgage payment will always be the same each month from the first payment to the last. The life of the loan is typically 30 years, though 15 years is also a popular option. Fixed-rate mortgages are the most uncomplicated and straightforward loans available.
Knowing that your mortgage payment will never change can be extremely helpful for your monthly budgeting and overall financial planning. You won’t need to worry about the direction of the market or changing interest rates, making it a low-stress, stable, and relatively simple option. It’s a particularly good choice if you intend to stay in your new home for the foreseeable future, and especially if your goal is to pay off your mortgage rather than sell your house and move in a few years.
Also known as variable-rate or floating-rate mortgages, these kinds of loans, as the names suggest, have interest rates that fluctuate over time depending on the market. The initial interest rate is typically lower than that of a fixed-rate mortgage, making monthly payments smaller for the beginning of the mortgage term, providing considerable savings. After the introductory period, the interest rate usually rises over time, resulting in higher monthly payments.
You can manage interest rate adjustments by planning ahead to prepare for increases, or you can opt to refinance at the end of the introductory period. The length of the introductory period varies depending on the type of adjustable-rate mortgage you choose.
An adjustable-rate mortgage is a good choice if you’re purchasing your home as a short-term investment, if you plan to sell and move within five years, or if you expect to be able to pay off the mortgage during the introductory period.
FHA loans are insured by the Federal Housing Administration. Because they’re backed by the government, they are typically easier to obtain than traditional mortgages. They also offer low interest rates, reduced closing costs, and down payments as low as 3.5%. FHA loans require up-front payment of a mortgage insurance premium equal to 1.75% of the loan amount, which is usually rolled into the total loan amount. You’ll also pay an annual mortgage insurance premium, divided into 12 and added to your monthly payments.
An FHA loan is good choice if you are working on your credit rating or if you want to keep your down payment very low.
Which One is Right for You?
There are a variety of factors that can help determine which loan type is best for your circumstances, including your desired loan amount, credit history, down payment, and future home ownership plans. Choose a lender with your best interests at heart who will take the time to understand your situation, explain your options, and advise you on the one that works best for you. With mortgage rates at their lowest in three years, you’re in a good position heading into the spring selling season.
Visit lonestarfinancing.com for detailed information on these and other loan options.