Choosing Your Next Home Loan

When we purchase a home, many of us do it with the thought that we will never move. Circumstances can change, and it may become necessary to switch to a new home, even if we have been in our existing home many years. In fact, the average buyer is expected to stay in their home for 13 years, so many people move multiple times in their lifetime.

If you think back to the time when you bought your first home, you probably remember how much you knew about the process. Many of us spent hours researching everything about getting into a new home, from finding the right home to suit our needs to how to save money on closing costs. Although we may have been educated then, times have likely changed and it may be necessary to refresh your memory. That is especially true when it comes to choosing your next home loan.

First of all, it is important to keep in mind that choosing a home loan is not like choosing a car loan. The options are often much more complex and our liability is much greater when buying a home. Make the right choice and you will love your home. Make a poor choice and it could cost you financially and when you struggle, you will not be happy with the home.

Options For Down Payment

Many people struggle to come up with a substantial down payment. If you are moving into a new home, you may have some equity built up, and that can go a long way to overcoming this obstacle.

A 20% down payment is not required on every loan, but it is required to avoid having to buy private mortgage insurance (PMI). Many people misunderstand PMI, feeling as if it is insurance that protects the buyer. It doesn’t. PMI protects the lender in the event you are unable to pay your mortgage. It is typically paid monthly, but it can be paid at closing or you could get a piggyback loan, which is a secondary loan that pays the PMI.

Choosing the Best Mortgage Loan

The other decision you will need to make is in regards to the type of mortgage loan you will use. There are a few options.

30 Year Fixed

The mortgage and interest are spread out over 30 years and the interest does not change. It is best for those who want the security of knowing what their monthly payments will be. You can also get similar loans for shorter time frames, such as a 15-year fixed mortgage. Mortgage interest is at a low, so this type of loan may be a good idea.

Adjustable Rate Mortgage (ARM)

The interest rate will vary on a specific frequency with this type of loan. The interest is typically lower than a 30-year fixed, but it will adjust with the market. They come in a number of types.

7/1 ARM – The rate and payment adjusts on the 8th year and every year thereafter.
1/1 ARM – The rate and payment adjusts every year from the start of the loan
3/3 ARM – The rate and payment adjusts on the 4th year and every 3 years thereafter.

Interest Only

With this type of loan, the buyer will only pay interest for the specified term, typically 5 or 10 years. Most people refinance at the end of the interest only period. This type of loan offers many benefits, such as being able to purchase a larger property and keeping payments low .

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