Are you a first-time homebuyer eager to take advantage of the real estate market and low mortgage rates? One of the most important steps on the road to homeownership is finding a loan that best suits your financial needs. The Federal Reserve offers the following tips when shopping for a mortgage.
- Know what you can afford.
- Shop around—compare loans from lenders and brokers.
- Understand loan prices and fees.
- Know the risks and benefits of loan options.
- Get advice from trusted sources.
- Here is a basic guide to the most popular home loans to get you started.
Definition: With a fixed-rate mortgage, the interest rate and monthly principal and interest (P&I) payments remain the same for the life of your loan. This type of loan is available with a variety of repayment terms, but the most common are 15-year and 30-year periods. In general, the longer the term of the fixed-rate mortgage, the more interest you will pay over the life of the loan and the higher your interest rate will be, but your monthly payments will tend to be lower than with a shorter term.
Benefits: Because your interest rate does not change periodically with a fixed-rate mortgage, the predictability of your monthly payment can make it easier to set a budget. This mortgage option protects you from rising interest rates, allowing you to take advantage of low rates. A fixed-rate mortgage may be a good choice if you plan to stay in the home you are purchasing for many years.
Adjustable Rate Mortgage
Definition: An adjustable rate mortgage (ARM) locks in an initial interest rate for a period of time such as 7 or 10 years, which is typically lower than that of a fixed-rate mortgage. However, once this initial period has expired, the rate can go up or down, depending on the index used. Most ARMs include interest rate caps that set a limit on how high your interest rate can rise. The term on an ARM is typically 30 years.
Benefits: An ARM can provide flexibility if you plan to own your home for only a few years or if you expect your income to rise in the future. And you can make additional principal payments to accelerate your loan. This option can also be advantageous if the current interest rate for a fixed-rate mortgage is too high.
Definition: An FHA loan is a mortgage loan that is insured by the US Federal Housing Administration and provided by an FHA-approved lender. In the event a homeowner defaults on this type of loan, the government insures the lender for the loss. FHA loans are available in a variety of fixed-rate and adjustable-rate loans and offer low down payment options. Each county has limits on how much can be borrowed with an FHA. For information on caps for FHA loans insured in New Jersey counties click here.
Benefits: While traditional loans require a down payment minimum of between 5 and 10 percent, FHA requires as little as 3.5% down. This can be helpful for buyers who have less cash upfront for a home purchase. FHA loans are designed for first-time homebuyers and can be more flexible when evaluating past credit issues. Another advantage of an FHA loan is that if you sell your home, the buyer can assume the mortgage.
Definition: Guaranteed by the U.S. Department of Veterans Affairs, a VA loan is designed to help veterans and their families secure home loans. The government doesn’t actually issue these loans; they establish rules to qualify applicants and they insure them against default. The loans offer up to 100 percent financing.
Benefits: VA loans offer benefits that other loans do not, including no down payment unless required by the lender and no monthly insurance premium.
A reputable financial consultant can walk you through home mortgage options to help you determine which is best for you. Prepare yourself for meeting with a professional by reviewing these 6 tips for securing a mortgage.
If you have additional questions, contact Jody Michael Tobia at 973-935-7119 or jtobia at lakelandbank dot com. Reverse and conventional mortgages, are offered through Lakeland Mortgage, a trade name of Sullivan Financial Services, Inc. and a wholly owned subsidiary of Lakeland Bank.