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In common parlance, a mortgage is a loan that you take out to purchase a home. The house that you purchase is the collateral for the mortgage and an assurance that the debt will be paid.
There are actually some different types of mortgages around so first time home buyers should do their research and find out what type of mortgage is most suitable for their particular situation.
Fixed-Rate Mortgage
In this type of home loan, the interest rate stays fixed for the entire duration of the loan. When considering this type of loan, it is most important to figure out and calculate how long it would take you to pay off the loan. That can be anything from 15 years to 30 years for most people. In this type of loan, your mortgage payments will not change.
This type of loan is popular because the borrower always knows exactly how much mortgage payments are because it is fixed for the lifetime of the loan.
Adjustable Rate Mortgage (ARM)
Adjustable rate mortgages or ARM is a type of loan where the interest rate is not fixed. Typically it starts off with a lower rate than fixed-rate mortgages but the rates change according to market conditions. At first, during the introduction period of about such as three, five or seven years, the rates are fixed.
After the introductory period, rates may move up or down monthly, semi-annually or annually. It’s also possible that it will stay the same for a long time before it adjusts. Rates rise and fall according to current market average rates. There is no way to predict what the rates will be in this type of home loan.
However, ARMs normally have a cap or a limit to how much the interest rate can go up. The ARM is popular for home buyers who do not plan to be in their home for a long period of time. It is also something of a gamble since interest rates might go down, which is good for the home owner but they might also go up, which is bad for the home owner.
Construction Mortgage
People who plan to build their own homes can take out a construction mortgage. This involves borrowing money to pay for the construction of the house. The borrower only pays the interest of the loan amount while building the house. Then when the house is built, the mortgage is usually carried over as a fixed-rate, traditional long-term mortgage.
Special Mortgages for First Time Buyers
Some lenders might offer a special type of home loan targeted towards first time buyers. Such mortgages for first time home buyers may have a lower required down-payment and may offer flexible credit and income requirements.
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Source by Sam Chalmers