Home buying is a big decision so we want to learn all we can about home mortgages before selecting our first loan. When you start looking around, house mortgages or programs are plentiful. With so many choices, how do you know which program is best for you?
First you need to understand the different loan types to choose from. We're going to discuss seven loan types so you can make the best choice for you.
Are you wondering what is a loan type? These are first time home buyer programs set up with specific terms.
Each individual one has its own criteria for you to pay them back.
Let me explain each of these so you can understand the terms and which first time home buyer programs may be good for you.
the end of the page I'll provide some links to investigate those ones
you want to look into further.
Now let's discuss these seven loan types:
Not all of these first time home buyer programs are perfect home mortgages for those buying for the first time. Others are specially designed for those first time buyers.
Fixed-rate mortgages are the most basic and the most popular mortgage product. Simply put, borrowers are guaranteed a stable, unchanging interest rate for the life of the loan, which can be 10, 15, 20, 25 or 30 years.
The payment itself is a combination of principal, interest and
escrow amounts (if selected) to pay for the property taxes and
insurance, such as homeowners, flood, mortgage, etc. While this is one
of the many first time home buyer programs, it does not always work out
for some that are home buying because they may face certain issues that
need to be resolved.
If you're looking to buy for the first time though, a fixed rate is a better choice. Some of the other loan types may be tempting, but have cause problems for them down the road. Let me explain.
When you don't have a fixed rate, that means your interest rate can adjust periodically. This may be attractive because of the lower interest rate offered in the beginning.
Unfortunately, it may not stay that rate. Many chose the adjusting kind in the 80's to get lower interest rates, but the rates moved against them tragically. Some lost their homes because of this. Their payments went so high they just could afford it any longer.
Of the first time home buyer programs, stick to the fixed rate mortgages, unless you are in a position to watch the rates and make a change quickly.
Adjustable rate loans are also one of the first time home buyer programs. However, it's not always the best choice for you. They are home mortgages where borrowers are given an introductory rate for a specific period of time, for example, one month to 10 years, depending on the product.
This rate is lower than a traditional 30-year fixed-rate mortgage, and in some cases, the difference is significant. Upon expiration of the introductory period, a borrower's interest rate will adjust on the "change date" on a regular basis for the remainder of the life of the loan. The new interest rate is based on a combination of a specific index - a variable economic indicator - and a margin percentage, which is predetermined at closing.
Adjustable rate mortgages can experience a great deal of payment
volatility depending on market conditions. That's why I don't recommend them for those buying for the first time.
However, these home mortgages also can be an excellent option. How is that? Let's say the borrower doesn't plan on living in a property for a long time. The lower rate may be perfect for them. Or they may need a low rate when they are just starting out.
Some products have adjustable rate mortgage options that includes the ability of converting to a fixed-rate loan known as a Convertible ARM.
Personally, I do not prefer this one because when it does adjust, interest rates may jump 2%-3%. Unless you are prepared for a higher payment avoid these type of first time home buyer programs.
I'll have to admit, I used this loan type for one of my homes. But I converted to a fixed rate as soon as I seen the interest rates were about to move against me. But in the beginning I had a lot of home for the low payment I was making.
While in the business though, I seen some not paying attention and were caught in higher mortgage payments. This loan type is risky for those purchasing for the first time.
There are some first time home buyer programs available that allow
borrowers to purchase or refinance a home without putting any money down
at closing. Pretty cool huh!
These products may emphasize lower credit scores, provide entry into selected housing markets or allow financial concessions by the seller. All zero-down products provide 100% financing for individuals who do not have sufficient funds for a traditional down payment.
Again, although this is the choice by many as one of their first time home buyer programs, you should be aware, this may not be your best choice personally.
Pay attention to their terms. Some may start out with a low mortgage payment, only to go up over a period of time. They count on your income going up over time figuring you can afford the change. So pay attention to the terms!
For loans that exceed the "conforming" loan size limits, there are products that have both fixed-rate and adjustable rates available. Loan size can be as high as $2 million.
Unless you have a rich uncle, lenders do not offer these as first time home buyer programs because of the size of the loans.
Although, I did see one first home buyer use this program. He was a doctor and bought a million dollar home. This program fit his needs perfectly.
Most buying a home for the first time cannot spend that kind of money. But there are a few who might be able to take advantage of this loan type.
Now let's look at the loan type that fits most first time home buyers.
Federal Housing Administration (FHA) and Veterans Administration (VA) first time home loans are government sponsored and guaranteed loan programs with very flexible qualification requirements.
VA loans are specifically designed for eligible military personnel, veterans, and widows or widowers of veterans. FHA/VA loans provide an affordable means of buying a home by lowering some of the costs of the mortgage.
I personally think FHA home loans are the best programs to use. It offers lower down payment, fixed interest rate as well as FHA allows you to use down payment assistance programs that create a real zero down home loan.
Many additional first time home buyer programs can be found with FHA and the VA. They can be fixed rate or adjustable rate. These are ones that are specially designed for those first time home mortgages.
Below I'll provide a link to their various products available. There are some other loan types that may be used to structure your particular mortgage program. Let's discuss some of these.
When you establish a home equity line of credit, what is created is a revolving checking account using the equity in your home as collateral. You can use this account to write checks for almost any reason.
Some people use it for home improvements, buying an automobile, paying off credits cards and more. Usually you have the option of making principal and interest payments or interest only. In almost all cases the loan matures in 10 years so you have to get it paid down to zero by this time.
Normally the interest rate is figured on prime plus a margin. The margin is the banks' profit. Usually it is a 1%-2% margin. So if the prime rate was at say 3% then you add the margin and your HELOC rate would be 4% or 5%. This is a great option for you if you're making a major purchase and want to spread the repayment out over some time.
Some first time home buyers like having this available. You don't have to use the money, but it's there if you need it. Of course, you have to buy a home that is below market enough that you have equity to use.
Perhaps you bought the home conventionally and made a huge down payment. With this type of program, its like getting some of your down payment back. Remember though, it is a loan that has to be paid back.
Maybe after closing on the house you would like to get some furniture or landscaping. Now you have funds available to do that with at a lower interest rate than a credit card.
I have used this loan type when I bought a foreclosure. I had money available to fix it up. But I also could afford the payments, which is one of the things you should consider.
Second mortgages, which have terms of five to 30 years, utilize the remaining equity in a property that a "first" mortgage is not using as collateral. Due to their increased risk, lenders traditionally charge higher interest rates on this product.
Second mortgages are useful for paying off debt, for avoiding higher rates associated with jumbo loans, or for eliminating private mortgage insurance when used in conjunction with a "first" mortgage that represents 80% or less of the value of the property.
There are some grant programs offered by some states that use this loan type to provide the down payment and closing costs for first time home buyers. Why would they call them a grant when you have to pay them back?
Depending on the terms, some set them up to be forgiven if your in the house for a period of time. Some even set them up with no payments or interest as long as you stay in the home.
That can be an awesome second mortgage! I'll provide a link below where you can see if your state offers such a program.
So what's the different between a HELOC and a second mortgage. A HELOC is a line of credit where the other is a mortgage.
When I was in the mortgage business, I was on the other side of this camp. I was one of the four loan officers calling people to make them loan offers. So I know how hard these guys will work to get your business.
Just be sure to select "purchase" and "first time home buyer" in the drop down boxes in the online form. Just 4 simple steps and you can find lenders around you that can offer first time home buyer programs unique to your community.
There used to be a buyer assistance program that helps first time home buyers. Find out what happened to it and what options you should consider now.
Remember I spoke of providing a link to see if your state offers some of the programs I mentioned earlier? Well, here's the link, go to your state and find out.
FHA Products offer you some great options. You can buy a home with low money down, get a great interest rate and even purchase a fixer upper.
Go to House Buyer Solutions Home Page.
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