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There are many decisions involved in buying a home. Choosing the right mortgage program is one of them. It is very important that you learn about the different loan types and also the different loan terms. A small change can mean big dollars for you.
First, you should shop around for a home loan. Call many lenders, and compare such factors as rates, terms, prepayment penalty, loan fees and closing costs. Get the complete picture. You can save a lot of money and spare you any surprises!
A word of warning - each lender has it's own program(s) and sometimes it's hard to compare. Make sure you are comparing "apples to apples".
You may want to get recommendations for a lender from your real estate agent, family, friends, or co-workers. Ask if they had a favorable experience with the loan agent.
Second, learn all you can about loans.
What types of loans are available and what are the advantages of each?
Fixed Rate Mortgages: Payments remain the same for the the life of the loan
Types of fixed rate mortgages include 15 year loans, 20 year loans, 30 year loans and some 40 year loans.
Advantages of a fixed rate loan:
Predictable - payments are constant and unaffected by interest rate changes and inflation.
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits (knows as "caps")
Types of adjustable rate mortgages:
Balloon Mortgage - Offers low rates for an initial period of time (usually 5, 7, or 10 years); when that time has elapsed, the balance is due or refinanced (though not automatically)
Two-Step Mortgage- Interest rate is fixed for a period of time, then adjusts for the life of the loan and for the remainder of the loan term, it becomes an ARM linked to a specific index or margin
Advantages of an Adjustable Rate Mortgage:
Generally offer lower initial interest rates
Monthly payments can be lower
May allow borrower to qualify for a larger loan amount
When does an Adjustable Rate Mortgage make sense?
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.
What are the advantages of 15 and 30 year loan terms?
30-year loans: In approximately the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions. As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
15-year loans: The 15 year loan is usually made at a lower interest rate than a 30 year loan. Equity is built faster because early payments pay more principal.
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