Home Buyers and First Loans
Buying your first home? You may be thinking the hardest decision you have to make is picking a house. However, the hardest decision you will be making in this process is what mortgage loan to sign for. The main types of loans are: fixed rate, adjustable rate, interest only and reverse.
Federal Housing Administration (FHA) Loans
For first time home buyers, Federal Housing Administration (FHA) Loans may be the best option. This program offers competitive interest rates, allows smaller down payments and has easier qualifications. The typical down payment required with this program is 3.5 percent of the purchase price of the home. FHA mortgage loans also require insurance, but they do offer a refund on it.
Fixed Rate Mortgage
A fixed rate mortgage is also referred to as PITI, Principal Interest Tax Insurance. With this mortgage everything is included: principal, tax, interest and insurance. For example, if you have a fixed mortgage, you don’t have to worry about forking over extra cash during tax season because you already paid this tax along with your mortgage. Usually a fixed mortgage is for 30 years, but you can also get a 15 year mortgage, depending on your finances. If you do qualify for a 15-year mortgage you can expect a lower interest rate, but higher monthly payments.
An adjustable mortgage has lower payments at the beginning of the loan. You can get this mortgage for 15 or 30 years. During this time, payments can be adjusted upward; as the market changes so do your payments. This type of loan comes with more risk because your payments change regardless of whether your income increases.
Interest Only Loan
An interest only loan usually takes 5 or 10 years to pay off, during this time your entire payment is going to pay off the interest. It’s a waste because although you are making monthly payments, you are not paying off your home. The only positive aspect about this loan is that it allows customers who expect to increase their income in the future to take out a bigger loan than they can currently afford. This type of loan comes with a high risk.
Reverse mortgage is especially made for those over the age of 62 and it was created through the government program HUD. These citizens get a portion of their equity and receive a payment every month. To become a part of this program there is no income or credit requirement. However, the cost to enroll in this program can be more than $8,000. Also, once the borrower dies, the bank settles the debt with the heirs.
A Debt Free American Dream
Achieving the American Dream without getting further into debt is possible. Regardless of which mortgage you sign for make sure you know the details. The key to avoiding traps is knowledge. Be realistic and buy a house within your means.
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