There is a multitude of mortgage loans available for the first time home buyer. Because of the large number and types of loans, first time buyers are sometimes confusing terms or conditions of one loan with another. With proper research though, first time buyers can end up saving a little bit of time and a considerable amount of money. First and foremost, the first time buyer should evaluate their own finances and then determine what type of mortgage suits their needs. The various types of mortgages are categorized by how they’re structured.
Federal Housing Administration loans are widely available to first time home buyers. They’re insured or guaranteed by the United States government. They’re a nice fit for first time buyers. They offer a lower down payment and are easier to qualify for. Down payment can be as low as 3% but watch out for any private mortgage insurance requirements with such a low downpayment. PMI can cost a few thousand dollars a year on top of the principal and interest payments.
These are traditional fixed rate mortgages that are not insured by the government. They’re generally more difficult to qualify for than an FHA loan, requiring higher credit ratings and a higher down payment. They can be either a fixed rate mortgage or an adjustable rate mortgage. Conventional loans have certain limits because they’re packaged and sold on Wall Street. Don’t confuse conventional loans with conforming loans. The loan amount is what determines whether a loan is conforming. Loans over the conforming loan limit are called jumbo loans. Jumbo loans carry somewhat of a higher interest rate as they’re not packaged and sold as frequently. Jumbo loans are still in the conventional loan family.
FIXED AND ADJUSTABLE RATE MORTGAGES
The first time home buyer must decide on whether they want a fixed rate or adjustable rate mortgage. A fixed rate mortgage is usually for 15 or 30 years. It maintains the same interest rate throughout the life of the loan. It will never change. With an adjustable rate mortgage, the interest rate is lower at the beginning of the loan. These are often of great assistance to first time buyers. There is some risk involved, since neither the buyer nor the bank know what interest rates will be like in the future. The mortgage agreement will state the maximum interest rate that the lender will charge. There is usually a 5% cap. Common adjustable rate mortgages might be for 3, 5 or 10 year terms.
The wisest approach for a first time home buyer is to do a thorough analysis of their finances and decide what they can reasonably afford. Those with a higher income, or a larger sum to put down are in a more favorable position with the lender. They also have more mortgage options available to them. Although a lender may allow you to, don’t bite off more than you can chew.