Finding the right financing when you’re looking to buy a home can be tricky, but it’s not impossible. The key is understanding the options in home financing that are available on the market today.
For many years, the most common method for buying a house was to obtain a standard mortgage through the bank. These loans are typically made for the sale price of the house minus a down payment made by the borrower. A monthly payment is then calculated for the borrower based on the amount of the loan, the interest rate, and the period of time over which to pay the loan back. Over the life of the loan, this payment remains the same no matter what. This allows a family to create a budget that incorporates this mortgage payment and keep it the same until the loan is paid off.
In recent years, however, banks have added several different financing options to the standard mortgage. One of the most popular of these options is the adjustable rate mortgage, or ARM. These loans allow a person to set their payback period, but the interest rate adjusts depending on a variety of market factors. This can be an advantage in cases where people take out a mortgage at a time when interest rates are high. As their interest rate drops, their monthly payment drops as well. In the case that the interest rates rise, however, a borrower’s monthly mortgage payment will increase.
ARMs can be a good option for people who are comfortable with the idea of a changing interest rate and mortgage payment. People who think that the market will produce lower interest rates in the future are typically attracted to this type of loan.
Another popular finance option for people who are looking to make large real estate purchases is the interest only loan. Borrowers with these loans do not pay back the principal amount of the loan until they sell their home or the loan expires. In the meantime, the monthly payment every month consists of just the interest on the loan. This can mean saving hundreds of dollars a month on the loan payments, but there will be no progress made towards actually paying off the loan.
Historically, these loans were used by commercial businesses who would buy and hold real estate for a short period of time. These loans were ideal for businesses that bought homes, fixed them up, and then sold them quickly. By paying only the interest on the loan, these loans kept their carrying costs down, and selling the property typically netted enough money to pay off the balance. When they were introduced into the residential market, however, these loans tended to be misused by people who wanted to get into homes they would otherwise be unable to afford. Today, it is very hard to qualify for one of these mortgages without showing that you have significant assets.
There are many combinations of these three types of loans available on the market today.