September 19, 2017
 
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Mortgage Basics: What Every Home Buyer Ought to Know

Before choosing a mortgage lender, negotiating closing costs, or locking in your interest rate, it’s to every home buyer’s advantage to come to the table with as much knowledge about home loans as possible. Brushing up on the industry language will enable you to ask educated questions as well as show the lender that you know what you’re talking about.

Choosing a Loan Program

The type of mortgage a lender offers typically depends on many different factors, including:

§ Your current financial situation

§ Expectations for financial change

§ How long you intend to keep your house

§ Your comfort zone, regarding size payment and potential for change

 

Mortgages are divided into categories in two different ways—conventional and government loans. Within these categories, there are various classifications regarding the interest rate—fixed rate loans, adjustable, and combinations. There are many more available, but these are some of the basics:

 

Conventional Loans or Fixed-Rate Mortgages 

With this type of loan, the interest rate does not change during the entire length of the loan and they’re not insured or guaranteed by the government. People are probably most familiar with 30-year mortgages, but 10, 15, and 20-year terms are also available. Deciding between a 30-year and a 15-year depends on your personal situation. With 30-year terms, the monthly payment is lower, but the interest rate is higher. This allows people to purchase larger homes with more affordable payments. By contrast, 15-year terms have higher payments with lower interest rates, but the buyer will quickly build equity and own their home sooner. If you’re on a tight budget, it’s wiser to go with the 30-year because your payment will be lower. A higher payment could cause major problems for a borrower who comes upon hard times with little savings. With a 30-year mortgage, the buyer has the flexibility of making more or larger payments when they want to pay it off quicker.


Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage offers a fixed initial interest rate and a fixed initial monthly payment. However, after a certain pre-determined time, the rate and term of the mortgage may be changed, per the contract. The interest rate gets modified to reflect the current market mortgage rates. They’re more risky than a fixed rate loan because, although the borrower starts with a lower monthly payment, it could go up if or when the interest rate goes up.

 

Government Loans

The federal government offers different types of programs to foster mortgage lending and encourage home ownership. Mortgage lenders are encouraged to make loans that they normally view as too risky.  

§ FHAThe Federal Housing Administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), insures lenders against loss in the event that a borrower defaults on their loan. FHA loans have lower down payment requirements and are easier to qualify than conventional loans.

§ VA loansThe U.S. Dept. of Veterans Affairs guarantees these loans. The guarantee allows veterans and service persons to purchase homes with favorable loan terms, usually without a down payment.   It is easier to qualify for a VA loan than a conventional loan. Veterans Affairs determines eligibility and, if qualified, issues a certificate of eligibility to be used in applying for a VA loan. Also, there is a maximum that lenders will typically loan.

 

For more information on FHA, VA, or other government housing loans, go to www.govloans.gov and click on housing.


Remember, knowledge is power. Becoming an informed homeowner can help you avoid the possibility of buying an inferior product that could put you and your family in a financial crisis.

 

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