If you are a first-time home buyer, you likely know that a mortgage loan will be something you use to purchase your home; however, the different types of mortgage loans available may be something you need to brush up on.
A mortgage is a loan that you get from a bank or mortgage lender that helps you finance the purchase of a home. A mortgage payment is typically paid on a monthly basis and is comprised of principal, interest, taxes and insurance.
- Principal is the total amount of money you borrowed.
- Interest is what the lender charges you to borrow money.
- Taxes include the property taxes you pay as a homeowner.
- Insurance includes homeowners insurance and can include mortgage insurance. Your lender requires you to get homeowners insurance because it protects the lender in the event that you default on your loan.
For the most part, homeowners will find the following three basic types of loans in the mortgage market.
- Fixed-rate mortgage. With this type of mortgage, your interest rate stays the same for the duration of the loan, and the amount you owe the bank or mortgage lender is split into equal monthly payments. Fixed-rate home loans can be 10, 15 or 20 years, but the 30-year fixed rate mortgage is the most popular because it makes your monthly payment the lowest. With a fixed-rate mortgage, the first few years you are mostly paying off interest and end up paying only a small portion of the principal.
- Adjustable-rate mortgage. The adjustable-rate mortgage differs from a fixed-rate mortgage in that your interest rates can change from year to year when using the former. Adjustable-rate mortgages feature lower interest rates and payments early in the loan term, but rates and payments can increase significantly over the life of the loan. Annual and lifetime caps can prevent high interest rates from burdening the homeowner too highly, however.
- Jumbo loans. In the highest-cost housing markets, a jumbo loan is characterized as a mortgage of more than $625,000. With an interest-only jumbo loan, a home buyer has the option of paying only the interest for the first five, seven or 10 years. After that, the borrower will pay both interest and principal, and in general, the interest rate adjusts on an annual basis.
Having a grasp on the basic mortgage loans for home buyers can help streamline the home buying process by allowing you to decide ahead of time which one might benefit you the most. Before committing to a particular mortgage loan, make sure you understand everything about it so that there are no surprises later down the road.
For more home buying tips and advice, continue to follow Realtor Ryan Roberts’ Homes Auburn blog! And for your home buying or selling needs in Auburn and Opelika, contact Ryan at 334-750-9872 or email [email protected]!
