First time homeowners are often shell shocked as they confront terms like PMI and “piggyback loans” in their quest for home ownership. That’s why having a good understanding of the mortgage industry is a good place to start. Interest rates and first time buyer programs may seem like industry jargon right now, but they will dramatically affect your bank statement and life style after you make your first real estate transaction.
You probably know that your credit score is going to affect the amount of money you pay for your home, but do you really understand why? Mortgage lenders look at your credit score to tell them how good the odds are that you will be able to follow through on your commitment to pay them back. Things like the amount of money you own, how prompt you are in making payments, and how often you play the balance transfer game (from a high interest credit card to a lower one) help them determine your credit score, and hence, your risk factor.
That credit score will impact the down payment you are required to shell out for your new home. It will also affect the interest rate that you are offered on your mortgage. But don’t be tricked into thinking that a small down payment is necessarily the best way to go. A smaller down payment can also indicate that you have fewer funds, and therefore require something called Private Mortgage Insurance (PMI). That’s because the lenders assume that if you can’t afford a down payment of a certain size(usually 20% of the loan amount), that you are a higher risk. Think of it this way:
Small down payment higher interest rate PMI
Ironically, one of the best ways to positively change all this is to put your saving efforts towards paying down credit, instead of building up a larger down payment for the mortgage loan. That will increase the amount of money you can borrow, and you will likely save money in the long run since consumer debt (read credit cards) tends to have higher interest rates than home mortgages.
The Best Type of Loan
The type of mortgage loan that is best for you will depend on a number of factors. Your down payment, what you can afford monthly, how long you intend to stay in your home, your age, and goals are all factors that will come into play. Conventional fixed, variable, ARM, balloon and piggybacked mortgages are all terms you might run into.
A fixed mortgage will stay at the same interest rate for the life of the loan. Although refinancing your mortgage is always an option. A variable mortgage can change over time to adapt to a lender’s index or prime lending rate. This can work in your favor or against you, but is intended to provide the mortgage lender with a consistent return on its loan.
Other loan types include graduated mortgage loans, interest only mortgage loans, negative amortization mortgage loans, and balloon mortgage loans. These are covered in detail in the article on types of mortgage loans.
Get With the Program
The best news for a first time homebuyer is that there are a ton of programs to help you obtain the mortgage you need. Even if credit or the down payment is an issue, government lenders Fannie Mae, Freddie Mac, and the US Federal Housing Authority (FHA) have a ton of programs designed to help get you into a house. There is a Good Neighbor program to help teachers, firefighters and other community helpers obtain mortgages with housing discounts. Bad credit mortgages, programs for seniors, and even programs for hurricane evacuees and housing project residents are available. The real estate and mortgage industry, and the government, really want to put you into a home of your own.