Monday, March 4, 2013

Home Loans Explained


If you are like the typical home buyer, there is a good chance that you will be getting a mortgage when purchasing your home. If you have never bought a home or have no idea about the different types of mortgages, don’t worry! Gozump has got you covered! Let’s start with the most common and go from there:

Fixed rate – Fixed rate mortgages are just that … loans with FIXED interest rates. Loan can be for 10, 15, 20, or 30 years. These loans are also typically fully amortized, meaning that your monthly payments remain constant and the loan will be completely paid off at the end.

Adjustable Rate Mortgage (ARM) – These loans have interest rates that can fluctuate up or down based on the financial index that it is tied to. Hybrid ARMs are usually advertised as 3/1 or 5/1. This means that the initial interest rate applies for the first 3 or 5 years. After that, the interest rate is adjusted annually. It is common for ARMs to have yearly and lifetime caps. These limit the amount the interest rate may go up or down.

Interest Only – Also called straight term mortgage. Payments are made towards interest only and usually short duration (3-5 years). While this loan has the lowest monthly payment, there is no principal reduction and the full amount is due at the end. We do NOT recommend this type of loan for regular home buyers.

Sometimes loans are referred to as FHA, VA, or conventional. This just describes if the loan is backed by the federal government. Here is how they differ:

Federal Housing Administration (FHA) – FHA loans will insure a lender against loss due to small down payment. These are available to anyone with a qualified income and allows for a down payment as low as 3.5%

Veterans Affairs (VA) – VA loans, like FHA loans, protects lenders against loss. VA loans require NO down payment. In order to be eligible, you must be a veteran who has served 181 days or on active duty since 1940.

Conventional – Any loan that is not backed by the federal government is considered a conventional loan. These typically require a minimum 20% down payment.  It is possible to get a loan with less than 20% down payment; you will however be required to purchase Private Mortgage Insurance (PMI). PMI is purchased upfront and usually included in your monthly payment.

Gozump recommends a fixed rate loan for most first time home buyers. If you can manage a 15 or 20 year term loan, go with that. The amount of money saved on interest when compared to a 30 year mortgage is usually enough to buy another home outright!

Additionally, we recommend speaking with your financial institution PRIOR to looking for homes. This gives you a better idea of what you can afford and will help focus your search. If you need assistance securing financing, contact us and one of our Champions will gladly assist you.

As always, if we missed anything or you have questions, please let us know in the comment section below.

Otherwise, why not sign up to test drive our exclusive OFFER ENGINE. See you on the inside!

13 comments:

Anita Sharma said...

A very good article on Home Loan as it is very useful information for the loan seekers. Keep updating it.

Denis Vanegas said...

Thanks Anita. Please send me any ideas for articles you may have.

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Homebuyers Plan said...

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Alex Stephen said...

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Friday Friday said...

Fixed rate mortgages are a much safer option than variable as they will stay the same and no external factors will influence it. However, in good times you will benefit from better rates on a variable one, therefore you must asses whether you prefer stability or risk and (possible) reward.

Lower Mortgage Rates in Mississauga said...

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albina N muro said...

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