15 Nov The difference between available mortgage types
When you’re about to apply for your first mortgage, you may wonder what to expect as far as your mortgage options. The first order of business when buying a home is to look at the financing and your mortgage options. It’s helpful to know what to expect before you go into that office of potential lenders so that you aren’t hearing everything for the first time from them.
Being educated on the different loan types will help you get the best possible mortgage for your family and your situation. The team at Redzone Realty Group should be able to help, but just so you can study up before meeting with them, here is a look at everything from basic home mortgages to balloon mortgages, and everything in-between.
Basic home mortgage options
For those that go with the basic home mortgage, you’ll be able to choose between a fixed rate and an adjustable option. A fixed rate mortgage is one in which the interest rate is set and won’t change for the entirety of the loan. You’ll be able to count on a consistent payment amount each month on your mortgage, regardless of the market. This is what the majority of homeowners choose because of its stability due to the locked in an interest rate that doesn’t change.
When you go with an adjustable rate, another popular option, you’ll have an interest rate that is tied to the index. This will fluctuate depending on what the market is doing, giving you the opportunity to save money some months, but also the risk of paying more than usual in other months. There are typically caps placed on the number of rate changes each period to limit rate increases over the life of the loan.
In some cases, an interest-only mortgage is applied in which a borrower pays only the interest on the loan for a certain amount of time. Your loan’s principal amount would not be paid down at all during this period, which gives you a smaller payment in the short term.
At the end of this period, your payments would increase though, including repayment of the principle in what is now a shorter time frame. It’s inexpensive at first and very expensive later on, depending on how long the interest-only period is.
If you’ve never heard of a balloon mortgage, this is another option you may want to consider if you don’t want to be paying on the loan for a long time. It’s set up like a typical 30-year fixed rate loan, except that the term is shorter. It’s only 5-7 years of a term and at the end of the term, whatever balance is left would be due in one lump sum. You can either pay it or refinance the home at that time.
If you are a first time home buyer with low income, you may be interested in a fixed rate mortgage through an FHA loan. This is a government loan through the Federal Housing Administration that allows you to qualify for a traditional fixed rate mortgage with a smaller down payment. You’ll also enjoy the perk of a lower interest rate and access to programs for the purchase of a single-family or multi-family home. You can also try a VA loan or USDA Rural Development Guaranteed Housing Loan through the government if you are lower income.
Biweekly or bimonthly mortgages
Lastly, be sure to understand your options for a bimonthly or bi-weekly mortgage. These loans work in which the borrower makes a payment every two weeks or two months, rather than the standard monthly payment arrangement.
For the biweekly option, you’ll have a much short repayment term at 26 payments a year rather than just 12. For the bimonthly mortgage, you won’t be required to make extra payments, you’ll save slightly on interest when you advance the payment by half the month, and they tend to shorten the loan by a month if you choose a 30-year mortgage.
Understanding the mortgage types is half the battle. Go in to see your lender with a heads up on the different options so that you aren’t making any rash decisions in the moment. Once you’ve determined what type of loan you need, perhaps you should check out our post “The First Time Homebuyers Guide to the Closing Process“.