3 types of mortgage loans for first-time homebuyers
For every home, there is a mortgage. Well, unless you’re loaded with cash, in which case you can probably go ahead and stop reading. If you’re still following along, you’re probably a first-time homebuyer. That means not only are you in the market for a home, but you’re going to need a home loan to pay for it. Shopping for a home can be fun and exciting, although probably a bit stressful at times. Shopping for a mortgage? Emphasis on the stressful part.
But for right now, sit back and relax. Just don’t relax too much, because you don’t want to doze off and lose your place as we walk through the mortgage loan options available to you.
If you were to look up the word “conventional” in the dictionary, some synonyms would be “regular,” “traditional,” or “typical.” All words that could be used to describe conventional mortgages, which are the most common type of home loans offered today.
What exactly is a conventional mortgage? It’s a home loan that is not insured by the federal government, so the lender assumes all of the risk. Conventional mortgages are a popular choice for homebuyers because there are fewer regulations on income, home type, and home location. In other words, they don’t have to be too picky. But lenders will require that you have a minimum FICO score of 620 and a debt-to-income ratio of 45% to 50%.
Conventional mortgages know what they want in a borrower. They are looking for a homebuyer with good credit, a stable source of income, and a down payment of at least 3%. However, if your down payment is less than 20%, the lender will need you to buy private mortgage insurance. Private mortgage insurance provides protection for the lender in case you stop making payments on your home loan. You would be responsible for paying the monthly premiums.
If you’re the type of person who likes to eat at the same restaurant all the time and you always order the same meal then a fixed-rate mortgage should be music to your ears. With a fixed-rate mortgage, there are no surprises. You pay the same amount every month. The interest rate on your loan never changes, regardless of whether your loan is for 15 or 30 years.
Fixed-rate mortgages are a good match for homebuyers who plan to put down roots. You might end up paying more interest with a longer loan, but if stability is important to you, a fixed-rate mortgage offers a rock-solid foundation for both you and your home.
Do you like roller coasters? Not everyone is a fan. But just like with fixed-rate mortgages, there is comfort in knowing what to expect. There is more risk involved with an adjustable-rate mortgage. And with risk, there is reward.
As you’d expect, an adjustable-rate mortgage is the opposite of a fixed-rate mortgage. To start, you’ll have a fixed interest rate for a period of time, but then your interest rate will fluctuate with the market after that. Your initial interest rate might be low, which will save you money on interest payments. The risk is in whether the rate will increase or decrease beyond that initial period.
If you don’t plan to stay in your home for long, the savings on interest could be worth it.
And that about covers it. Thanks for sticking with us through to the end! If you have any questions about the different types of mortgage loans, please get in touch with our mortgage partners at Luminate. They’re here to help you!