Different Types of Mortgage
What Is a Mortgage?
There are two components to your mortgage payment—principal and interest. The principal refers to the loan amount. Interest is an additional amount that lenders charge you for the privilege of borrowing cash that you can repay over time. During your mortgage term, you pay in monthly installments based on an amortization schedule set by your lender.
Another factor associated with estimating a mortgage is the annual percentage rate(APR), which assesses the total cost of a loan. APR includes the interest rates and other loan charges.
Mortgage terms, including the length of repayment, are a vital factor in how a lender prices your loan and your interest rate. Fixed-rate loans are what they sound like: A set interest rate for till your loan exists, usually from 10 to 30 years.
If you need to pay off your loan faster and can manage the cost of a higher monthly installment, a short-term fixed-rate loan (say 15 or 20 years) helps you shave off time and interest installments. You’ll also build equity in your home much faster.
Choosing a shorter fixed-term mortgage implies regular installments will be higher than a long-term loan. Do the math to ensure your budget can deal with the higher installments.
Fixed-rate loans are ideal for buyers who intend to stay put for a long time. A 30-year fixed loan may give you wiggle space to meet other financial requirements. Although, if you have the appetite for a little risk and the resources and discipline to pay your mortgage off faster, a 15-year fixed loan can save you significantly on interest and cut your repayment period down in half.
Adjustable-rate mortgages(ARMs) have a fixed rate for an initial period of up to 10 years, however, after that period expires the rate varies with market conditions. These loans can be risky if you are unable to pay a higher monthly mortgage payment once the rate resets.
Some ARM products have a rate cap specifying your monthly mortgage payment can’t surpass a specific amount. If so, do the math to ensure that you can potentially deal with any installment increments up to that point. Don’t count on selling your home or refinance your mortgage before your ARM resets since economic situations—and your finances—could change.
ARMs are a great alternative if you don’t plan to stay in a home beyond the initial fixed-rate period or know that you mean to refinance before the loan resets.
First-Time Assistance Programs
Special programs supported by states or local housing authorities offer assistance explicitly to first-time buyers. Many of these programs are available based on buyers’ income or financial needs. These programs, which generally offer help in the form of down grants, can also give first-time buyers a good deal on closing costs.
The U.S. Department of Housing and Urban Development (HUD) lists first-time homebuyer programs by state. Select your state and choose “Home Buying Assistance” to discover the program closest to you.
Mortgages for First-Time Buyers
All these loan programs (except for first-time homebuyer assistance programs) are accessible to all homebuyers, regardless of whether it’s your first or fourth time buying a home. Many individuals falsely think FHA loans are accessible just to first-time buyers, but repeat borrowers can also qualify as long as the buyer has not owned a primary residence for at least three years leading up to the purchase.
Choosing the loan that’s best for your circumstance depends basically on your financial wellbeing: Your income, credit history and score, employment, and financial goals. Mortgage lenders can help analyze your accounts to help determine the best loan products. They can also assist you better understand the qualifications requirements, which tend to be complex.