Buying your first home can be exciting- but it can also be confusing. After all, there are so many financial factors involved including choosing between mortgage types and understanding interest rates.
If you are a first-time homebuyer in or near Lexington and Lake Murray, SC, the Lafayette Team with EXP Realty can help. We will work with you to help you navigate the maze of mortgage types and help you make an informed decision that will benefit you in the long run.
In this article, we’ll explain the various mortgage types and what you need to know about interest rates.
7 Mortgage Types
As a first-time homebuyer, you’ll have several mortgage types to choose from. Each has its own terms and benefits. The best way to make a wise choice is to understand the differences between them:
The interest rate on a fixed-rate mortgage remains the same throughout the life of the loan. This means that you’ll know exactly what you will owe each month- which makes it much easier to budget. This is a great choice when the interest rates are low because it locks in that rate for the entire loan term- even when rates increase, the rate on a fixed-rate mortgage stays the same. However, it’s important to note that they come with a slightly higher initial rate than an adjustable-rate mortgage.
The interest rate on an adjustable-rate mortgage, or ARM, adjust periodically after a period of 3 to 10 years. This adjustment is attached to a benchmark rate. This type of mortgage often offers lower monthly payments initially. However, as rates increase, your payment will likely be higher too. This type of mortgage is best if your plan is to sell or refinance before the rate adjustment occurs.
The FHA, or Federal Housing Administration, offers loans with low down payment requirements and flexible qualifying criteria. These are ideal for first-time homebuyers that have less-than-stellar-credit and don’t have a large down payment. However, this type of mortgage typically requires mortgage insurance, which increases your monthly payment.
If you are an active-duty service member or a qualifying veteran, you may be eligible for a VA mortgage loan. These loans have favorable terms including competitive interest rates and no down payment requirements. This type of mortgage is ideal for those who have served in the military.
The USDA, or United States Department of Agriculture, offers mortgage loans to homebuyers in rural areas. These loans are for those who have low to moderate incomes and often require little to no down payment. This type of mortgage is a great option for those who meet the criteria.
An interest-only mortgage allows homebuyers to pay only the interest for a specified period, usually the first 5 to 10 years. While this does lead to lower payments initially, the principal will need to be paid off later, which often means substantially higher payments once the interest-only period expires.
A balloon mortgage typically has lower monthly payments for a fixed period, typically 5 to 7 years. Once this period ends, the remaining balance must be paid in one balloon payment or refinanced. This is risky because it means that you’ll need to either have a significant amount of money saved for the balloon payment or will need to secure new financing.
Understanding Interest Rates
In addition to understanding mortgage types, it’s important that first-time homebuyers understand interest rates. Here’s what you need to know:
Interest rates on mortgages fluctuate daily based on broader economic factors including the Federal Reserve’s monetary policy, market demand, and inflation. Therefore, it’s critical to monitor rates and be ready to act when you find one that meets your needs.
Your credit score plays a significant role in determining the interest rate that you will qualify for. Typically, the higher your credit score, the lower your interest rate. This often results in significant savings over the life of the loan.
Once you have found an interest rate that you are comfortable with, you can lock it in for a specified period of 30 to 60 days. This will protect you from potential increases during that time, which is critical when interest rates are steadily increasing.
Some lenders will offer the option to pay “points” upfront to reduce your interest rate. Each point is equal to 1% of the loan. This makes sense if you plan to stay in the home for a long time because the long-term savings on monthly payments will offset the upfront cost.
Mortgage terms are typically 15 to 30 years, which can impact your interest rate. In most cases, a shorter term loan will have a lower interest rate but a higher monthly payment, while a longer term loan will have a higher interest rate but a lower monthly payment.
When you’re considering buying a home, it’s important to get multiple quotes from various lenders. This will help you get the best deal. When making your decision, it’s important to consider a variety of factors including interest rate, loan term, fees, and closing costs.
As interest rates change over time, you may be able to refinance your mortgage to get a lower rate. Refinancing can lead to lower monthly payments and/or a shorter term, which can save money in the long run.
The Lafayette Team Can Help You Find Your Perfect Home
As a first-time homebuyer, it’s critical that you understand your mortgage options and how interest rates impact your finances. Let the Lafayette Team with EXP Realty guide you on your journey. We can help you explore your options and secure a loan that meets your needs and budget.