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Your Mortgage Loan Options
If you are a first time home buyer The Federal Housing Administration was created specifically to help you, especially borrowers with moderate or low income. The advantage of these types of loans is that they require only 3% for a down payment. However, there are plenty of conventional loans out there, too.
The first and often best option is a fixed-rate mortgage loan. Generally these are 15 or 30 year loan terms, but you can find them in 40 or 50 year terms in certain markets. Fixed rate loans are just what they say – your interest rate remains the same throughout the loan’s life, regardless of market changes. Your payment on principle and interest are consistent from the first payment to the last. The benefit of this loan is that you are protected if interest rates rise because of market turmoil. However, if rates drop you have the option to refinance.
The converse of this is adjustable-rate mortgages or ARMs. These generally have lower initial rates, but once the beginning period is over the rate adjust and usually become much higher. The downside to that is that when interest rates in the market get higher so does the interest on your mortgage, which can lead to payments not being able to be met and possible foreclosures. Often the interest rates are adjusted at set times based on your particular loan terms and there is a cap on how much your interest can change for each interval. If you choose an ARM you’ll need to be very careful in your research and comparison among lenders.
You could also get an interest only loan. Your loan payment will be lower and more flexibility, but you won’t be building equity. Equity is the best reason to own a house so this option may not be the wisest choice. Also, once the interest only option runs out you may not be able to afford the whole payment. Make sure that you understand and can handle the terms of an interest only loan very clearly before going with it.
If your down payment on your home isn’t 20% or more then you are required to have Private Mortgage Insurance or PMI. This insurance protects a lender in the event you default on a loan. However, you can avoid paying this insurance by taking out a second loan that pays for the remaining 20% of your home. However, the interest rate on a second loan will be higher.
Additionally you can apply for refinance loans to get a better rate or a home equity loan if you need extra cash and want to take it out using your home’s equity as security. Whichever type of loan you are consider, be sure to take with different lenders and compare your options to make the best possible choice for your life.
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