Thinking of buying a home? If the answer is yes, then your next concern will be what type of financing or mortgage loan will you get to pay for the home. It can all sound so confusing when people use mortgage lending terms with numbers and percentages that you don’t understand. In the next few paragraphs, we are going to go over all the different types of mortgage loans available and what they mean for you and your situation.
Fixed Rate Mortgage
A fixed rate mortgage, in my opinion, is the safest loan that you can get. With this type of loan your interest rate never fluctuates, therefore, your monthly payment will remain the same for the duration of the loan. This allows you to stick to your budget and you won’t have to worry about you’re payment increase two or three hundred dollars from month to month. It may not always offer the cheapest monthly payment compared to other loans but it’s the most consistent. The terms for these types of loan can range anywhere from ten to forty years but most homebuyers stay between fifteen and thirty-year notes.
You are probably saying to yourself, “What the heck is an ARM mortgage?” ARM is the abbreviation for adjustable rate mortgage. Okay here is where this type of loan can get very tricky and very risky. For the first five years of the note, the interest rate will stay the same. After the five year period is over the interest rate can change at the lender’s discretion. The interest rate for the first five years is usually extremely low. This is how the lender reels you in because it’s such a low-interest rate in the beginning that it’s hard for homeowners to realize that after five years it’s more than likely going to be raised significantly. Let me put this into dollars and cents for you. With this type of loan your payment could be twelve hundred one month and the next month it could jump up to two thousand dollars. This has caused a lot of homeowners to lose their homes because they can’t afford the huge increase in their monthly payment.
Interest Only Mortgage
With interest-only mortgages, you will only pay the interest on the loan for the first five to ten years of the note. However, since you are only paying interest and no principal amount for that period, then it will take you that much longer to pay off the note. These types of loans initially look good to borrowers because the payment is low, due to it being interest only, but if you sit down and do the math you will learn that you will be repaying this note for around forty years.
FHA and VA Loans
The FHA loans are guaranteed by the Federal Housing Administration to the lender in case the borrower fails to repay the loan. These types of loans are usually for first-time homebuyers with lower income and they also require a smaller down payment amount. VA loans are guaranteed by the Department Of Veteran Affairs and they are for members of the armed forces and or their spouses. They make it easier for them to get loans for housing and require no down payment.
For any of these loans, you will have to prove your financial income to the lender. Usually, they will require you to provide them with two years of tax returns anyone that is going to be on the loan. Your credit score must also be high enough in order for the lender to approve you for any loan.