Looking for a home is a big decision and one that usually comes with a good amount of stress. You have to figure out an entirely new set of finances and figure out what kind of mortgage or loan is going to work the best for you. Many homeowners will seek professional advice, but almost 60% wish that they had a better understanding of the terms and specific details of their mortgage. Even if you seek professional help, they may not be able to break down every single bit of the mortgage, and if you seek refinancing or different payment plans, having that intimate knowledge could be important. If you’re thinking about buying a home, you should know the general types of mortgages — a conventional mortgage versus a government-backed mortgage like VA home loans.
What Is a Conventional Mortgage?
A conventional mortgage is a type of home loan that doesn’t have any backing from the federal government. Freddie Mac and Fannie Mae mandate the loan limits. A conventional mortgage can further be divided between a fixed rate mortgage and an adjustable rate mortgage. The usual terms for a conventional loan are 15, 20, or 30 year mortgages and are issued by private companies, like banks or private lenders.
Though there’s a larger down payment with a conventional mortgage, it means that in the long run, homeowners will wind up having less expensive monthly payments. And it’s good for the lender, since these types of mortgages tend to be higher risk, versus government backed loans. However, for those who might be a bit cash poor, they should know that there’s a higher up front and out of pocket rate for a conventional mortgage.
Talk To Me About Fixed Rates Versus An Adjustable Rate Mortgage
A fixed rate mortgage is pretty much what it sounds like — the interest rate is fixed once the loan is taken out and won’t change, even if the market does. The 2017 NAR Home Buyer and Seller Generational Trends report shows that over 90% of buyers in 2016 opted for a fixed rate mortgage, proving that it’s the more popular option. It’s a bit more fiscally conservative than an adjustable rate mortgage, and easier to budget for, especially for those who have less wiggle room financially.
An adjustable rate mortgage doesn’t have a fixed interest rate. The interest rate can fluctuate depending on the index, which is a wider range of interest rates. Opting for an adjustable rate mortgage can be a great gamble, if interest rates stay low — but if they spike, you may wind up having to spend more month to month than you bargained for. However, if you have a good amount of disposable income or savings and feel confident that you could manage the fluctuations, you may find that your mortgage can be paid down quicker.
Looking at your financial situation and consulting with a financial planner is the best way to gauge which option to go for.
If I’m a First Time Home Buyer, What Should I Know?
You definitely want to do some mortgage planning and come up with a solid mortgage plan. Try and pay a little extra on your mortgage every month, which will go towards your principal. Budgeting here is key, so don’t forget that when you own a house, there are extra costs that go with it. Paying for extra things like taxes, property insurance, and maintenance come into play — and you may find that utilities are also higher.
Before you go house hunting, find a loan first. Getting prequalified for a mortgage means that you’ll have all your ducks in a row when you want to pull the trigger on your dream home. And try to shop around for a mortgage that won’t totally wipe out all your savings — you still want to make sure you have enough in the bank for a rainy day.
Figuring out your financial situation before you take the plunge is the smart thing to do. You’ll feel better and more confident about what’s to come and you’ll be able to make moves on the home you want immediately.
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