Buying a home will likely be the biggest purchase you’ll ever make and the biggest debt load you’ll ever carry. Unfortunately, almost 75% of buyers admit they never truly understood all the ins and outs of their mortgage before signing on the dotted line. Most people think a mortgage is like a promissory note, where you owe the bank money that is paid back over an agreed upon period of time. Technically speaking, a mortgage isn’t a loan. It’s a document that you actually give a bank that says they have the right to use your home as collateral in the event you don’t repay the loan. Given that there is so much at stake it’s highly recommended to know what type of mortgage to use in the purchase of your new home. Two of the most popular are a fixed rate and adjustable rate mortgages but there is a wide variety of other mortgage products available. Here is a description of six broad categories of mortgages.
- Fixed Rate: The interest rate and monthly payments stay the same for the life of the loan.
- Adjustable Rate: The interest rate changes every year with the market, and payments may go up or down accordingly. They usually come with ‘caps’. A periodic cap limits how much the interest rate can be increased each time it is adjusted. A lifetime cap is the total amount an interest rate can increase over the lifetime of the loan.
- FHA (Federal Housing Administration) loan - Allows buyers who may not qualify for a home loan to obtain one Low down payment. The size of the loan may be limited.
- VA Loan - Guaranteed loans for eligible veterans, active duty personnel and surviving spouses Offers competitive rates, low or no down payments. The size of the loan may be limited.
- Balloon - Usually a fixed rate loan with relatively low payments for a fixed period. After an initial period, the entire balance of the loan is due immediately.
- Interest – Only – the borrower pays only the interest on the loan in monthly payments for a fixed term. After an initial period the balance of the loan is due.
FHA and many other banks have programs or loans that allow you to buy a home, fix it up, and include all the costs in one loan. Or, if you own a home that you want to re-model or repair, you can refinance what you owe and add the cost of repairs - all in one loan. You can include the costs of energy improvements into an FHA Energy-Efficient Mortgage. The government offers a free downloadable brochure to help buyers learn how to shop, compare and negotiate mortgages. The brochure has a Mortgage Shopping Worksheet and a glossary of terms in the back. The brochure is a great tool that any buyer should have as they begin the process of home shopping.