You may have first encountered mortgages while playing Monopoly as a child. And, unfortunately, that may have been the beginning and end of your home loan education. If you’re thinking about buying a home and aren’t lucky enough to be among the 44% of homeowners who can afford to pay cash, a mortgage is vital.
There’s a lot to learn about home loans that you never gleaned from board games. Read on for an overview of different types of mortgages and what to watch out for to help determine which is best for you.
Know your goals
Start by identifying your goals.
- Do you prefer low monthly payments, or paying off the mortgage quickly?
- Do you want a fixed payment throughout the life of the loan, or a lower payment for the first few years?
- How long do you plan to stay in your home?
The answers to these questions will guide you through the home loan process.
Types of mortgages
There are two kinds of mortgage loans: conventional and government-backed.
Conventional loans are the most common and are provided and backed by private lenders. Government loans are insured by the U.S. government, they include mortgages from the FHA, VA, and USDA. These are available to people with lower incomes and credit scores who meet certain criteria, and generally offer lower down payments.
What’s your rate?
The next step is to determine your preferred rate: fixed or adjustable. A fixed-rate mortgage (FRM) offers the same monthly payment over the loan term, so you’ll know exactly how much to budget each month. An adjustable-rate mortgage (ARM) has a low, fixed introductory rate for the first 3, 5, 7, or 10 years and then “adjusts” based on prevailing interest rates.
If you plan to stay in your home for a short period of time, an ARM may be perfect — you can benefit from its low rate and then either sell or refinance to an FRM. With an ARM, rates fluctuate once the introductory period is over, so it’s harder to plan your budget.
Know the term
Next, decide on the length (term) of the loan: The most common ones are either 30 or 15 years. The advantage of a 15-year loan is that you may capture a lower interest rate and pay off the loan more quickly. With a 30-year term, you may have lower monthly payments, but the interest rate will typically be higher.
When you apply for a mortgage, ask your lender or mortgage advisor to compare and contrast different loan types for your individual situation.
Now you’re ready to find the best type of mortgage for you. You may not be buying Park Place or Boardwalk, but you’re well on your way to financing the home of your dreams.
Please contact us at Finance of America Mortgage to learn more about your options. We are happy to help you determine which mortgage is right for you.