Buying your first home can be very exciting. Most first time buyers are so keen to buy their home that most of their efforts are concentrated in searching, inspecting and comparing the different homes available on the market. Very few would do they research in the type of loan most applicable to their situation. Some don't even bother to get pre-qualified or even pre-approved before they start their search for a home. This could lead to a lot of heartaches for all the parties involved from the buyer, agent to the seller. All their efforts can go in vain if the buyer is not financially capable of buying the property after all.
However, things can get worse as we often hear in various foreclosure stories. Some buyers took up a loan and signed an agreement without barely understanding the terms and conditions of the loan. There were cases of loans approved for borrowers who can't really afford to pay for the loan in the first place. Meanwhile, many took up adjustable rate mortgage (ARM's) with low initial rates that resets to higher interest rates after a certain period. Many were badly hit by this type of mortgage because they could not afford to pay the higher repayments.
Here are some of the different type of mortgages:
- Fixed-Rate Mortgage
- Adjustable-Rate Mortgage (ARM)
- 1-yr. Treasury ARM
- Intermediate ARM
- Flexible Payment Option ARM
- Interest-only ARM
- Convertible ARM
- Jumbo Loans
- Assumable Mortgage
- Balloon Conforming Mortgage
- Balloon Mortgage
- Veteran Administration Loan
- Federal Housing Administration Loans (FHA)
You can read more about these type of home loans, the pros and cons and things to watch out for here.
Choosing the right home loan is as important as choosing the right home for your family. Do your own personal research of the different types of mortgages, so you can have an overview before you talk to a lender. It will be easier to understand what your lender or mortage broker is explaining when you have a bit of background. It will also make you more resilient to fraudulent mortgage brokers.
Lastly, you have to make sure that you can afford to pay for the loan. It's easy to get tempted to take out a bigger loan to be able to buy your dream house. Some mortgage brokers can encourage you to take out a loan you can never really afford to pay. Some can do it unintentionally because they don't know your overall spending pattern. Thus, it is better to trust what you know you can afford to pay than to take a loan amount you've been pre-approved.