Picking a mortgage term

2/6/2014 12:10:14 PM

First-time home buyers often head into the mortgage process unaware of what type of home loan is right for them. Mortgage terms vary greatly from lender to lender and in length. Choosing the right one can take a lot of research and some house hunting experience. Here are some considerations every home buyer needs to think about before picking out a mortgage:

Short- versus long-term loans
There are advantages to both short- and long-term loans depending on a borrower's financial situation. Homeowners who want to pay off their mortgage sooner should opt for a loan with a shorter term. The advantage of this is that there is less interest to pay off over time, making the loan less expensive compared to one that is longer.

A 30-year fixed-rate mortgage is the most common type of mortgage among homeowners, but other common terms are 20- and 15-year home loans. With a longer term loan of 30 years, mortgage payments are much more affordable for most Americans compared to 15-year mortgages, as the loan is paid off in twice the amount of time. For first-time home buyers, this is the most common loan term, which can usually help them get more house for their money.

When homeowners are near the end of their loan terms, it is common for a mortgage refinance to be done in order to pay off the principal cost faster and reduce the total amount of interest owed. Reducing a loan term will increase monthly mortgage payments. Interest rates for a 15-year fixed-rate home loan are also typically lower compared to a 30-year fixed-rate mortgage.

Fixed versus adjustable rates
In addition to the length of the home loan, borrowers have the choice between an adjustable- or fixed-rate mortgage. With a fixed-rate mortgage, homeowners have the assurance that their rates will not increase as the market changes. However, they are then stuck with the same rate if the reverse happens, unless they refinance.

Adjustable-rate home loans usually offer a low introductory interest rate for a certain number of years and the beginning of the loan term. After that time period has expired, rates are subject to rising with market conditions. ARMs have recently become more popular among home buyers looking for the cheapest mortgage options.

First-time home buyer programs
In an effort to reboot the housing market and help the economy recover, many first-time home buyer programs have been initiated since the recession. The Federal Housing Administration is one such source for homebuyers that has been around since 1934. Mortgages by the FHA allow borrowers to become homebuyers with a low rate mortgage and a very small down payment on their home - as little as 3.5 percent.

By comparison, other mortgage types like jumbo loans require down payments as high as 20 percent. First-time home buyers typically don't have enough to cover high down payments and therefore choose other mortgage types.

Contact the Federal Savings Bank, a veteran owned bank, to find out more about first-time home buyer programs.