Buying your first home is exciting, but it can also be kind of scary. In fact, you may think that everyone is speaking in a foreign language when you first start investigating mortgage loans. There are so many unfamiliar terms. Unfortunately, what you don’t know can cost you if you don’t know all of your options before you sign a mortgage loan agreement. Prior to going house hunting, stop for a while and make sure that you know the different loan types that are available to first-time homebuyers and which ones are best-suited to your budget, credit history and new home.
1. Fixed rate loans. Fixed rate loans are just that. With a fixed rate loan, you pay one set amount every month until your loan is paid off. As long as you keep making your payments, the loan amount will never change. The most common fixed rate mortgage loans are 15-year and 30-year loans.
2. Adjustable rate loans. Adjustable rate loans offer a set (usually lower) interest rate for the first few years of the loan and then a rate that is “adjusted” to current market conditions at regular intervals for the duration of the loan. The adjustment is based on the Prime lending rate or one of several other market indexes. Such loans are good for home buyers who don’t expect to live in their home more than three to five years. Adjustable rate loans are commonly written as 3/1, 5/1 or 7/1 loans, with the first number being the number of years the initial interest rate is charged and the second number being how often (in years) the interest rate is adjusted after that initial period. Adjustable rate loans frequently carry a penalty for paying off the loan early.
3. FHA loans. FHA loans can be a good choice for first time home buyers with less than perfect credit. Since these loans are backed by the U.S. government, they typically require a less stellar credit rating than traditional mortgage loans. In most cases, FHA loans require only a three percent down payment, another plus for a first-time buyer. FHA loans are available from a variety of mortgage lenders and can be either fixed rate or adjustable rate loans.
4. VA loans. VA mortgage loans are available to current and former members of the U.S. armed forces. VA loans are backed by the U.S. Department of Veterans Affairs and almost always offer a lower interest rate than other types of loans. VA loans can be either fixed rate of adjustable rate loans.
One of the best ways to compare mortgage interest rates is by using an online comparison tool like the one offered for mortgages here, allowing you to compare loan products side-by-side. To see what you can afford, check out our free budgeting tool also.