Determining What Type of Mortgage is Right for You

When you are ready to buy a home, you will most likely need to arrange funding through a mortgage company.  Consumers are barraged with so many advertisements, acronyms and financial terms these days that it’s very hard for first-time home buyers to feel confident that they have selected the best type of mortgage and individual loan program for their particular situation.

Lenders are in the business of selling loans. Therefore, potential borrowers must understand that, although lenders are required to disclose certain information about their loan programs, there is a lot of information that borrowers need to uncover on their own. 

For these reasons, you need to obtain a mortgage as an educated consumer.  Learn as much as you can about different types of mortgages ahead of time, either by talking to a financial advisor, reading information about mortgages, or talking to friends and family members with home-buying experience.

If you elect to get advice and information from friends and family members, keep in mind that no two financial situations are exactly alike.  Certain factors may make a mortgage program perfect for someone else, but not quite right for you.

Brush Up on Your Mortgage Vocabulary
Here are some of the common types of mortgage loans programs offered by most lending agencies:

1. Fixed-Rate Mortgage: The fixed-rate mortgage is also called a “traditional” mortgage, since it is the most common type of home loan.  In a fixed-rate mortgage, the borrower is quoted an interest rate that will remain in place for the life of the loan, regardless of how the economy performs during that time. Fixed-rate mortgages are amortized over 15 or 30 years in most cases, and the payments are equally distributed over the life of the loan.

1. Adjustable-Rate Mortgage (ARM): The adjustable-rate mortgage is another traditional type of mortgage that generally offers a lower introductory interest rate to borrowers.  After the initial introductory rate expires, the lender reissues the interest rate in accordance with current market conditions.  In some cases, the interest drops, benefiting the borrower. Unfortunately, the interest rate may instead increase.  The interest rate is periodically adjusted over the life of the loan.  In this type of mortgage program, the borrower faces variable payments depending on the interest rate. 

1. Interest-Only Mortgage: In an interest-only mortgage, the borrower receives a loan with a repayment period of usually ten to 15 years.  During the amortization period, the borrower pays only the interest that accrues on the loan.  At the end of the loan period, the borrower must satisfy the remaining balance in one of several ways  These include refinancing through the current lender or another lender, paying off the balance due with a lump-sum payment, or selling the home.  This type of program is great for borrowers who intend to sell their home within the loan period or for those who are savvy investors.  However, this type of mortgage ccarries substantial risk for the borrower who intends to stay in his or her home beyond the initial loan period.

1. Balloon Mortgage: A balloon mortgage is similar to an interest-only loan, with the difference being that the borrower makes payments on interest and a portion of the loan principle.  With a balloon mortgage, the borrower receives the loan for a short period of time and the loan does not fully amortize over that period.  Consequently, a balance-due settlement must be paid at the end of the loan period.  Options for making this payment include refinancing, a lump-sum payment, or selling the home.

Determine How Much You Can Afford to Pay Ahead of Time
As stated above, lenders are in the business of selling loans.  The more a home buyer borrows, the more profit the lender makes.  Therefore, you should not trust a lender to help you determine how much you can afford in monthly mortgage payments.  To determine the amount that you are able to pay, you will need to consider your long-term financial obligations, such as education costs, new vehicle costs, home improvements, and more. 

Never let a lender tell you that you can afford more than you believe you can pay.  Otherwise, you may be locked into a excessively high fixed payment for the life of the loan that prevents you from meeting your other financial obligations.

Investigate Assistance Programs in Your Area
Many localities and cities offer assistance with the home-buying and borrowing processes to individuals who meet certain criteria.  Many federally insured loan programs offer borrowers lower interest rates than do standard mortgage programs, as well as reductions in the down-payment percentage.  Some programs even waive down-payment requirements completely.

Some programs offer to pay all or a portion of the closing costs for a home purchase, whereas others provide low-interest second mortgage loans for home improvements.

If you are a first-time home buyer, or if you have not purchased a new home for many years, researching all of your options is the best way to be prepared for a mortgage. New mortgage lenders and programs appear every day, and borrowers who may have been unable to borrow enough money in the past may now be able to do so.

The financial aspects of home mortgages are sometimes confusing, but if you do your research ahead of time you will be more likely to get the loan that is best for your specific circumstances.

Once you have determined how much you can afford to pay per month and have some ideas about which types of mortgage programs might work for you, call some lenders.  Ask to speak with a loan officer and share what you have learned.  Lending offices that are not willing to take the time to discuss their programs in-depth with you will probably not provide good service in the future after you have taken out a mortgage. 

After you have found a lending agency that you feel comfortable with and you have investigated all the assistance programs that are available for you, it is time to begin reviewing the individual loan programs offered by your selected lender.

Your realtor should be prepared to provide you with more information about home mortgage programs, assistance programs and lender servicing.  Realtors have significant experience working with both buyers and sellers, so they have a wealth of information on these topics.  Sometimes your realtor may be able to recommend an excellent option that you haven’t already considered. 

Once you have decided which type of loan program you want, it is time to get pre-approved for a loan in the amount that you would like to borrow.  Potential lenders generally offer a pre-approval program that can speed up the buying process.  Doing your research up-front allows you to move into your new home much sooner.