June 3, 2013

First Time Homebuyer Tips Part 2: Shopping For a Mortgage

In part one in our series we looked at the initial steps first time homebuyers should take in the course of buying a home. In this post we will focus on loan types and shopping for a mortgage that will serve your needs.

What Types of Mortgages are Available to Homebuyers?

There are two conventional ways to get a home loan. The traditional loan is acquired through a bank or mortgage company. The alternative is to acquire a government backed home loan. There are numerous types of home loans available to borrowers; in this post we will cover key points of first time buyer FHA loans, fixed rate loans and adjustable rate loans.

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For first time homebuyers there are special loans offered to qualified buyers. Loan rates, restrictions and subsidies vary by jurisdiction but some of the advantages of a first time buyer home loan include:

  • Low or no down payment
  • Low interest rates
  • Fee limitations imposed by lenders
  • Offer grants
  • Loan forgiveness
  • Interest costs subsidies

What is an FHA Loan?

The Federal Housing Authority insures home loans made by banks and other lenders to borrowers.  Check out this FHA loan checklist. While an FHA loan may have some of the above advantages such as low down payments and interest rates they can be quite restrictive. Some common caveats with an FHA loans are:

  • Maximum loan to value ratios
  • No closing costs can be included in loan amount
  • Restrictive refinancing
  • Up front mortgage insurance premium as a percentage of loan with rates subject to change
  • The FHA will often put a cap on the price of the house and therefore the loan amount
  • Generally you must live in the home for which you acquire the loan

FHA and other government backed loans work wonderfully for low income buyers and those with less than decent credit. However, homebuyers with good credit and median or above incomes may do better with a non-government subsidized loan.

Fixed Rate Mortgages

Fixed rate mortgages generally come in 15 and 30-year terms. Fixed rate mortgages are popular primarily because homebuyers don’t like the idea of their mortgage payments varying each month with corresponding interest rates. When rates are low fixed mortgages are economical. Fixed rate mortgages offer:

  • Interest rates that remain the same for the life of the loan
  • Low monthly payments
  • Tax benefits for high interest payments

With a 15-year mortgage versus a 30-year mortgage equity accrues much quicker, interest rates and payments are lower and amortization schedules are shorter.

Adjustable Rate Mortgages

Like fixed rate mortgages adjustable mortgages generally come in 15 and 30-year terms. Unlike fixed rates, adjustable rates vary resulting in monthly payments rising and falling. Adjustable rate mortgages are far more complex then their fixed rate counterparts. Adjustable rates may offer:

  • Initial below market interest rates compared to fixed rate loans
  • Adjustable rate schedules
  • Possible overall lower interest payments

Adjustable rate mortgages are complicated, payments can increase rapidly and all terms and contracts should be heavily scrutinized and fully understood by borrowers.

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At Good Stuff Moving we know how difficult the home buying process can be and hope our tips shed a little light on the process. Moving into your first home is a milestone and cause for celebration. We take pride in being part of helping families as they achieve their dream of home ownership. The professional crew at Good Stuff Moving is dedicated to making your move stress free. Contact Good Stuff Moving today for a free quote.

Check back for Part 3 in our series on buying your first home.

Are you a first time homebuyer? What has the process been like, what have you learned? Share your experiences with us in our comment section below.

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