First-Time Home Buyer's Guide
Chapter 2
understanding loans & mortgages

A Guide to the Different Loans & Mortgages

Once you’ve saved up enough money for a down payment on a house, you’re ready to meet with a mortgage lender to learn about your mortgage options. Stay ahead of the game by learning the home loan basics before that meeting, and you’ll be ready to get a mortgage pre-qualification.

How Mortgages Work

To start, it’s important to understand what a mortgage is. A mortgage is a loan from a bank or creditor to help you finance the purchase of a home. The home you buy will technically be owned by the bank until you pay back the loan. If you fail to pay back the loan, your lender can take over the house, which is known as a foreclosure.

Your mortgage payment includes several separate payments :

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Principal

Your principal balance is how much you borrowed to buy the home. For example, if your loan is for $300,000, your beginning principal balance is $300,000.

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Interest

When you borrow money from a lender, you’ll pay interest, which is the amount they charge for loaning you money.

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Taxes

As a homeowner, you’ll pay property taxes. This amount is usually calculated based on the value of your home.

Different Types of Home Loans and Mortgages

Keep in mind, there are many types of mortgage loans available aside from what’s included, so take the time to dig into your options and find what works best for your financial situation. Get in the know by taking a look at some of the most popular options.

Private mortgage insurance. Private mortgage insurance typically goes by the acronym PMI. Simply put, lenders feel more comfortable giving a home loan to borrowers who can put at least a 20 percent down payment on the home purchase. If you don’t have the full 20 percent, you’ll have to pay PMI. This insurance is designed to protect the lender in case you quit making your home loan payments.

Tip — keep track of your payments and once you believe you’ve hit 20 percent in equity, let your lender know so they can remove the PMI from your payments.

Government guaranteed mortgages. The Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) have home loan options that are great for first-time home buyers because they typically have lower down payment requirements and allow more people to qualify. There are restrictions on these types of loans and your lender can help you determine if one of these mortgages is right for you.

Fixed-rate mortgage. With fixed-rate home loans, you get to lock in your mortgage rate. This is a very popular option because it gives borrowers a set amount that is due monthly. If you get a fixed-rate mortgage you can pick the loan length to fit your budget. Most fixed-rate mortgages come with 15- or 30-year term options.

Adjustable-rate mortgage. An adjustable-rate mortgage is often called an ARM. Rather than locking in a rate for the entire length of the loan, ARMs change over time. The benefit to this type of mortgage is it often starts with a lower interest rate. At set dates throughout the loan, the interest rate is adjusted based on market conditions.

Choosing Your First Mortgage

A little research goes a long way in the world of homeownership. You’re already on your way by taking the time to learn some of the common terms and the basics of home loans. Continue your positive momentum by talking to several different types of lenders to see who offers the best rates and conditions. Getting referrals from your friends and talking to your regular banker is also a great way to start!

Getting a Mortgage Pre-Approval

Another smart move to make before shopping for a home is getting pre-approved for a mortgage, rather than pre-qualified. Getting pre-approved shows a seller that your financing is in order and you’re serious about purchasing a home. Want to know more? Take a look at the difference between a pre-approval and pre-qualification.



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