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Homebuying for Beginners: What Types of Mortgages Are Available?

Posted by Twin Cities Habitat for Humanity on 10:57 AM on April 6, 2018

Buying a home is an exciting experience, especially if it's your first time. If you've never taken out a home loan, it's perfectly normal to be unfamiliar with your mortgage options. Don't let mortgage confusion discourage you from that homebuying excitement!  

It's easy to get lost in all of the information out there, but we're here to help. We'll explain what a mortgage is, how it works, what types of mortgages you're likely to see, and the advantages and disadvantages of those types.

What is a Mortgage?

A mortgage is a loan that a bank or a mortgage lender gives you to help pay for a house. You'll be responsible to pay back the loan over the course of several years or decades.

Types of Mortgages and How They Work

There is more than one type of mortgage to consider when purchasing a home. A couple of the most common mortgages include fixed- vs adjustable-rate mortgage:

  • Fixed-rate mortgages, which have the same monthly interest rate until the total amount is paid off. So, if you take out a 30-year, fixed-rate mortgage at 3 percent interest, you will pay 3 percent interest for 30 years. No more, no less.
  • Adjustable-rate mortgages, often abbreviated as ARMs, have interest rates that change over time. The rates could change after one year, then again after three years, five years, etc. The rates adjust with the market, but typically start with a low rate for the first few years and then adjust to match the current market rates. Most adjustable-rate mortgages include a “cap,” meaning that the interest rate cannot go any higher than that amount.

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Advantages/Disadvantages of Fixed-Rate Mortgages

Fixed-rate mortgages are beneficial for a first-time homebuyer because:

  • They stay the same for the life of the mortgage.
  • They make long-term budgeting easier.
  • They're often easier to understand.

However, this type of mortgage also has its disadvantages because:

  • They can be more expensive.
  • They don't include customizable terms.

Advantages/Disadvantages of Adjustable-Rate Mortgages

Adjustable-rate mortgages are beneficial for a first-time homebuyer because:

  • The lower introductory interest rate can make buying a more expensive home possible.
  • They can be easier to qualify for.
  • They offer an affordable option for people who don't plan to live there long.

However, this type of mortgage also has its disadvantages because:

  • Rates and payments can increase significantly over the life of the mortgage, potentially making the payment unaffordable.
  • The terms can often be more complicated to understand.

Still uncertain what type of mortgage is best for you? TCHFH Lending, Inc. can help you determine which mortgage works best with your finances, and whether or not you're a good match for their unique mortgage product.

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Tags: Homebuyer Tips, Homeownership Program, 2018, Habitat Mortgage

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