MBA, Realtor® DRE # 01229636
A Mortgage Lesson For First Time Buyers
Buying your first home can be an exciting and rewarding experience, but it is also unique from any other type of purchase transaction. It is easy for first time buyers to become overwhelmed with Real Estate terminology. Throw in some market jargon and it could become a recipe for complete confusion.
One of the most important factors in a home purchase is understanding the various types of financing options that are available. For those first timers, or those who simply need a refresher course, the following brief overview of some of the different types of mortgages may be helpful, but please remember to always get legal and financial counsel before making any final mortgage decisions.
FIXED RATE MORTGAGE
A Fixed Rate Mortgage refers to a mortgage with an interest rate that will never change over the life of the loan. This can be beneficial if mortgage rates increase during the term of the loan, but if interest rates drop, the owner's initial higher interest rate remains the same (unless the owner decides to refinance at the lower rate.)
ADJUSTABLE RATE MORTGAGE (ARM)
An Adjustable Rate Mortgage offers a fixed initial rate, however, this loan is subject to changes in market conditions. The initial rate paid is usually lower than a fixed rate mortgage, but unlike a fixed rate, the rate becomes uncertain after the initial period. This type of loan is usually, but not always, used by owners who plan on staying in their homes for relatively short periods of time since they want to take advantage of the lower initial rate. For instance, a 5/1 ARM means the interest rate will stay the same for the first five years and then adjust each year beginning in the sixth year. A 2/2 Arm means an initial fixed rate for two years, and would then adjust every two years starting at the third year.
BALLOON LOAN
A balloon Loan is a usually a short term, fixed rate loan. This loan allows for smaller payments, but must be "paid in full" at a specified time in the future. For instance, a six month balloon loan would require periodic payments for the first six months, but the loan would need to be paid in full at the end of the six months.
GOVERNMENT BACKED LOANS
Finally, there are Government Loans which consist of FHA and VA. An FHA loan is insured by the Federal Housing Administration and is available to all qualified homebuyers. The size of FHA loans, however, has limitations which are frequently too restrictive for Southern California home purchases. A VA loan is a long term, low/no down payment loan guaranteed by the Department of Veterans Affairs. This loan is only available to qualified military veterans who have an eligibilty certificate from the Department of Veterans Affairs.
There are many other types of mortagages to learn about as well, such as dual index mortgages, interest only mortgages and more. I hope that this helps clarify some of the basic information about mortgages. Please feel free to call me for more information or for a reference to a qualified loan consultant. As always, I am here to help you to best understand all of your options and to make your home buying experience as easy and as informative as possible.
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