Types of Mortgages
A mortgage is simply a type of loan you take out to
purchase a home. The home is considered collateral for the
loan and it functions as a guarantee that the loan will be
repaid.
There are a lot of mortgage options out there for you to choose from, so it’s very important that you do your homework to find the one that will best fit your financial situation. Here are some of the most common:
Fixed-Rate Mortgage
With a fixed-rate mortgage,
the interest rate is the same for the life of the loan. When
you take out this loan type, you’ll want to consider how
long you want to take to pay off the loan; for most people
that’s anywhere from 15 to 30 years.
Adjustable Rate Mortgage (ARM)
Adjustable rate
mortgages usually start off with an interest rate that is a
little lower than that of a fixed-rate mortgage, but that
rate can change based on market conditions. The rate can
move up or down monthly, semi-annually, annually or it might
even remain fixed for a while before it adjusts. Usually, an
ARM will have an adjustment “cap,” limiting the amount the
interest rate can go up. This is a popular option for people
who plan to be in their homes a shorter period of time.
Construction Mortgages
If you are building a
home, rather than purchasing an existing home, you might
consider a construction mortgage. This loan usually has a
two-step borrowing process. The first part of the loan
covers the duration of construction, during which time
you’ll draw money to pay the builders, paying only interest
on the outstanding amount. Then, you’ll go through a second
closing at which time the loan will typically convert to a
traditional, long-term fixed-rate mortgage.
Mortgages for First-Time Home Buyers
Most lenders
will offer some type of lending program for first-time home
buyers. These loans make it a little easier for you to buy a
home because they typically require a smaller down-payment
and offer more flexible credit and income requirements.
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