If you are a first time home mortgage buyer, there are a lot of things that can confuse you. This is a guide with just a few things you should consider when applying for your first home mortgage loan. The home buying process can be an exciting one, but not always the easiest. You need to decide what type of home loan is best for you. Besides picking your home, this is the most important part in your decision. Here are a few things you should compare in the mortgage offers you receive.
Principal
Principal is the amount of money you will be applying to borrow to purchase your home. Principal is essential the difference between what you’re going to pay for your house minus the amount of your down payment. When you look for a mortgage, each lender will prepare an offer of how much they are willing to offer you depending on your amount of income and your credit score. This will help you decide how much you can spend on a house.
Mortgage Type
Typically there are two types of mortgages; fixed interest rate mortgages, and adjustable rate mortgages (ARMs). Fixed rate mortgages are usually less risky, but have a little bit higher interest rate from the beginning. On this type of mortgage you usually pay the same amount each month for the life of the loan. With ARM loans you typically get a lower interest rate in the beginning, but the rates change with the market. That’s why ARM loans are risky, because you could being paying quite a bit more, especially if it’s going to take you 30 years to pay off your loan. That’s a lot of time for the market to increase.
Most mortgage lenders will offer both these options along with others. Some will offer a combination of the two types. Others will offer you the choice to decide how much you pay each month. When searching for your home mortgage make sure you understand the pros and cons of each type of loan and know your own level of financial responsibilities.
Interest Rate
Interest rates are the most advertised part of home mortgage loans. However, finding the lowest rate doesn’t always make for the best deal. If you find a low interest rate, but the loan has high closing costs, it might end up costing you more in the end. The best thing to look for in a mortgage interest rate is the annual percentage rate (APR). The APR takes into consideration not only the interest rate, but other costs involved with the loan.
If you decide to go with an ARM loan you need to know how your interest rate works. ARMs are determined by adding the published index rate (determined by a third party) plus the margin that your lender determines. This sounds like a lender could still charge you whatever they want, but there are laws that cap the rate on ARMs to help protect you from ridiculous increases from one year to the next.