Mortgages for First Time Homebuyers
- posted 3.26.2015
- Shantell Russell
- Personal Finance
The first step of purchasing a home is securing a mortgage. Understanding what a mortgage is and what types are offered is essential when buying a house for the first time. Familiarize yourself with mortgages and the options that you have before deciding to move forward with this major life decision.
A mortgage is essentially a loan for a house. When you decide to invest in a home, you must make a down payment. The remaining amount of money due for the house is provided by a bank or mortgage lender.
Your home serves as collateral for the loan and if you fail to make mortgage payments, your house becomes repossessed by the bank.
Additionally, there is a specific interest rate just as with any other loan.
30-Year Fixed Mortgage Rate
Interest rates can fluctuate with the market, but if you have a 30-year fixed-rate mortgage, your rate will remain the same. The benefit of a 30-year FRM is that you will be able to plan out your finances for an extended period of time and know exactly what your bill will be. This is the best option if you are planning on purchasing a home for the long term.
The potential disadvantage of this type of mortgage is that rates might dip lower in the future. For example, mortgage rates have been historically low throughout 2014. Freddie Mac, a government-sponsored enterprise, reported that the average 30-year FRM for was 3.8 percent in 2013 and 3.66 percent in 2012. Both of these rates are drastically low when compared to the rates prior to 2008.
Refinancing a Mortgage
When rates plunge downward, homeowners often have the option to refinance. This gives individuals the opportunity to have a lower interest rate when they are paying off their mortgage. While this is a good option, you should not refinance multiple times throughout the duration of your mortgage payments. Closing costs can add up, ultimately being detrimental to your bank account.
If you are not looking for a long-term loan, an adjustable-rate mortgage fluctuates with the market. This may be beneficial especially if you are looking to move into a starter home. These mortgages typically start out with a lower interest rate and then increase after the introductory period.
Never assume that you will sell your house or be able to refinance before your rate increases. Be prepared to pay the adjusted rate.
Where to Go
Mortgages are offered by not only savings banks but also credit unions, mortgage bankers, brokers, savings and loan associations, commercial banks and government agencies. Shop around for the best possible deal.
In addition to providing money, lenders will also be able to interpret what type of loan is best suited for you and your goals.
Part of buying a house is making a down payment. It is important to put down a larger sum up front because it could mean a lower interest rate on your loan. According to Forbes, the golden standard is to put down 20 percent toward your purchase.
Putting 20 percent toward your home will also mean that you will be making smaller monthly payments because you will be borrowing less from a lender, and a lower interest rate you will be paying less money over the life of your loan. Don't be discouraged if you do not have 20 percent to put down, there are programs available to help you qualify and will still allow you to have an affordable payment.
Saving up for your down payment requires you to make sacrifices and cut out expenses. The savings from not going on daily coffee runs, packing a lunch for work and cooking more meals at home will add up. If you are purchasing a home with another individual, also consider budgeting to live off of one paycheck and saving the other one for a down payment.