A complete real estate market melt down is still firmly in the mind of many millennials. This has a large number of them continuing to rent as the housing market gradually improves. If you are thinking of buying a home, there are a lot of things to consider. The type of mortgage you have will impact your financial future for many years to come. Make an informed decision by knowing the basics about each type and how it may work to your advantage or disadvantage.
Adjustable rate mortgages (ARMs)
The rate for a one-year adjustable rate mortgage decreased to 2.39 percent from 2.40 percent during the second week of July, 2014. Five-year adjustable rate mortgages dropped from 2.99 percent to 2.97 percent.
Also known as variable-rate mortgages, this type of loan is considered one of the more risky. Your monthly payments will be adjusted at specified times based on the status of the interest rate and market behavior. While you do get a lower payment and interest rate initially, rates can increase steadily over the life of the loan. Typically there is a maximum interest rate and monthly payment. If you are considering an adjustable rate mortgage, base your decision on whether or not you can comfortably afford the maximum payment with the highest possible interest rate.
Fixed rate mortgage
On July 17, 2014, Freddie Mac reported that the rate for a 30-year fixed mortgage dropped from 4.15 percent to 4.13 percent.
The most common type of home loan is also the simplest and best way to plan your budget over the long term. It is available in 10, 15, 30, and 50-year terms. The interest rate remains the same and so does your monthly payment for the life of the loan. It is not affected by inflation, the stock market, or fluctuations in interest rates. You can use tools like the Bankrate mortgage calculator to see the results of making extra payments toward principle.
Federal Housing Administration loan (FHA)
This loan is insured by the federal government and makes loans available to families and individuals who may not qualify for a conventional loan. It requires a lower down payment and make qualifying easier for first-time home buyers. You can visit the U.S. Department of Housing and Urban Development for more information.
U.S. Department of Veterans Affairs (VA loan)
Available to both veterans and the spouses of deceased veterans, the requirements for this type of home mortgage vary according to how many years the veteran served and what kind of discharge they received from the U.S. Armed Service. The primary benefit is that no down payment is required. Visit the U.S. Department of Veterans Affairs for eligibility requirements.
Interest only loan
This loan got a lot of people in trouble a few years back and contributed to the real estate market collapse. Your monthly payments go only toward interest for a set amount of time. That interest rate might be fixed or adjustable. When the interest only period ends, payments increase and go toward both principle and interest. Interest only periods are typically 5 to 10 years.
Regardless of which loan you are planning to use, begin preparing several months before you start shopping for your new home. Get copies and your credit report and make sure there are no errors. Speak with a loan counselor at your bank to see if there are any things you can do to improve a low score. The better your score and the more money you save for a down payment, the better your position when you are ready to purchase your home.