Since the mortgage loan process can be complex and confusing, the first step – before you go loan shopping – is to take advantage of the free online budgeting and calculating tools available so you can determine how much you afford. Second, understand the differences between the major mortgage loans. It is also a good idea to review your credit report. If there are outstanding debts, such as unsecured credit card debt, that need to be reduced or settled, you should examine the possibilities.
There are Many Types of Mortgages
Fixed-Rate Mortgage has a set interest rate and monthly payment over the period of the loan. The typical loan terms are 10, 15, 20, 25, 30, and 40 years. Fixed-Rate is the most common mortgage type and best for many people because the payments stay the same for the life of the loan. Typically these loans have a higher interest rate than other types of mortgage loans.
FHA Loan is provided by the Federal Housing Administration (FHA). These loans are designed primarily for first-time home buyers with little income along with other qualification guidelines. The loans usually have a smaller down payment and monthly payments.
VA Loan is available to Military Veterans and is guaranteed by the U.S. Department of Veteran Affairs. The loans usually permit Veterans to pay little or no down payment. However, there is often a limit to the loan amount and Veterans must be able to show the monthly payment is affordable.
Interest-Only Mortgage requires payment of loan interest only. Typically the monthly payments are less because you are just paying the interest. However you are able to make payments towards the principle if you choose.
Option ARM Mortgage is an adjustable rate loan in which the interest rate will adjust every month. Initially monthly payments may be less than other loan types; however they can increase rather quickly over time.
Adjustable-Rate Mortgage has an interest rate which is based on an index that reflects the prices in the housing market; thereby changing the interest rate according to the market. This interest rate change occurs at certain fixed times during the loan. Over time, interest rates tend to increase, which means payments will increase.
Mortgage Buydowns allow a smaller interest rate for a certain loan period by financing discount points in the loan. Buydowns work a few different ways and the buyer may have to pay fees upfront or use this system to avoid paying additional cash at closing.
Balloon Loan is a short term fixed rate mortgage that is based on a 30 year fixed mortgage. The loan increments are usually three, five or seven years. At the end of the term, you must pay the rest of the loan in full or refinance.
Now that you have general idea of the various mortgage types, make sure you discuss the options available to you with a qualified, licensed professional.