Chapter 2

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A Guide to Different Home Loan & Mortgage Options

Once you’ve saved up enough money for a down payment on a house, you’re ready to meet with a mortgage lender to learn about your mortgage options. Stay ahead of the game by learning the home loan basics before that meeting, and you’ll be ready to get a mortgage pre-qualification.

How Mortgages Work

To start, understanding mortgages is important. A mortgage is a loan from a bank or creditor to help you finance the purchase of a home. The home you buy will technically be owned by the bank until you pay back the loan. If you fail to pay back the loan, your lender can take over the house, which is known as a foreclosure.

Your mortgage payment includes several separate payments:

Principal

Your principal balance is how much you borrowed to buy the home. For example, if your loan is for $300,000, your beginning principal balance is $300,000.

Interest

When you borrow money from a lender, you’ll pay interest, which is the amount they charge for loaning you money.

Taxes

As a homeowner, you’ll pay property taxes. This amount is usually calculated based on the value of your home.

Different Types of Home Loans and Mortgages

Keep in mind, there are many types of home and mortgage loans available aside from what’s included, so take the time to dig into your options and find what works best for your financial situation. Get in the know by taking a look at some of the most popular options.

Compare some of the most popular mortgage options:

The Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) have home loan options that are great for first time home buyers because they typically have lower down payment requirements and allow more people to qualify.

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Government Guaranteed Mortgage

Low down payment
Higher monthly payments
Higher interest rates, fixed

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With fixed-rate home loans, you get to lock in your mortgage rate. This is a very popular option because it gives borrowers a set amount that is due monthly. If you get a fixed-rate mortgage you can pick the loan length to fit your budget.

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Fixed-Rate Mortgage (15-year term)

Higher down payment
Higher monthly payments
Lower interest rates, fixed

Learn More >

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Fixed-Rate Mortgage (30-year term)

Lower down payment
Lower monthly payments
Higher interest rates, fixed

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An adjustable-rate mortgage is often called an ARM. Rather than locking in a rate for the entire length of the loan, ARMs change over time. The benefit to this type of mortgage is it often starts with a lower interest rate. At set dates throughout the loan, the interest rate is adjustable based on market conditions.

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Adjustable-Rate Mortgage (ARM)

Lower down payment
Lower monthly payments
Lower interest rates to start, but variable over time

Learn More >

Down Payments and Private Mortgage Insurance

Private mortgage insurance typically goes by the acronym PMI. Simply put, lenders feel more comfortable giving a home loan to borrowers who can put at least a 20 percent down payment on the home purchase. If you don’t have the full 20 percent, you’ll have to pay PMI. This insurance is designed to protect the lender in case you quit making your home loan payments.

Tip

Keep track of your payments and once you believe you’ve hit 20 percent in equity, let your lender know so they can remove the PMI from your payments.

Choosing Your First Mortgage

A little research goes a long way in the world of homeownership. You’re already on your way by taking the time to learn some of the common terms and the basics of home loans. Continue your positive momentum by talking to several different types of lenders to see who offers the best rates and conditions. Getting referrals from your friends and talking to your regular banker is also a great way to start!

Getting a Mortgage Pre-approval

Another smart move to make before shopping for a home is getting pre-approved for a mortgage, rather than pre-qualified. Getting pre-approved shows a seller that your financing is in order and you’re serious about purchasing a home. Want to know more?

Resource

The Difference Between a Pre-approval and Pre-qualification

What’s the difference between the two? Here’s everything you need to know about pre-approvals and pre-qualifications.

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More Chapters in This Guide

Starting to shop for homes but don’t know where to start? Learn about what to look for when buying a house so you can find the perfect home for your needs.

Found the home of your dreams and want to place an offer? Read our tips for making an offer on a house and learn how much to offer to stay competitive in the market.

What can you expect from the home appraisal and inspection process? Our homebuyer guide is here to help demystify home inspection and appraisals. Check it out today!

Choosing the right insurance policy for your new house is another important step in the home buying process. Learn about how homeowners insurance works and find the best coverage for your home today.

Closing on a home is both an exciting and hectic time. Learn about what to expect during a home closing, with a checklist of what you need for a successful closing day.

Congratulations! You’ve closed on your home and can start making it your own. But there are a few final steps you’ll need to take. Use the following resources to make your transition into your new home as smooth as possible.

Buying a home for the first time? Our first-time home buyer guide explains the process of buying your first home, step by step. Read more today!

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