Real Estate 101: Understanding Mortgages

By
Real Estate Agent with Bramlett Residential

If you are like most first time homebuyers, you do not already have the money saved up to purchase the home you have selected.  As such, you will need to borrow money from a lending institution in order to help you finance your purchase.

Before you enlist in the services of a Realtor to help you find a great home, you should consider the various financing options that are available to you in order to determine which one is right for you.  By having a good idea of the pros and cons of each as well as which options you qualify for, you will have a better idea of how much you can afford to pay for a home as well as whether or not you are truly ready for the responsibilities of home ownership.

There are ten main forms of financing that you can select from.  These include:

• Fixed rate mortgages
• 10/1 year adjustable rate mortgages
• 7/23 mortgages
• 7/1 year adjustable rate mortgages
• 7 year balloon mortgage
• 5/25 mortgages
• 5/5 and 5/1 year adjustable rate mortgages
• 5 year balloon mortgages
• 3/3 and 3/1 year adjustable rate mortgages
• 1 year adjustable rate mortgages

Fixed rate mortgages can be created to be spaced out over 10, 15, 20, or 30 years.  With this financing option, the interest rate that you pay and the amount of your monthly payment will remain the same throughout the lifetime of the loan.  This type of loan is best if you plan to live at least ten years at the properly and if you prefer having the same payment each month, which is easier when it comes to monthly budgeting.

With the 10/1 year adjustable rate mortgage, on the other hand, your interest rate and your monthly payments will remain the same for the first ten years, but will b adjusted every year after that.  This type of loan is ideal if you plan to live in the property for ten years or more and only need stability in your loan payments for a short period of time.  On the other hand, it is also good if you plan to move within ten years but want the loan to remain in place for longer in case your plans change. 

The concept is the same with the 7/1 year, 5/1, and 3/1 adjustable rate mortgage.  The 5/5 and the 3/3 are similar, though the interest rate is addressed every fiver or three years after the first five or three years are completed.

With the 7/23 mortgage, which is also referred to as 2-Step, your interest rate and your payments will remain the same for the first seven years and will then be adjusted according to the interest rates at the time.  The new payment amount will remain in effect for the remainder of the loan.  The same is true with the 5/25 loan, though the change will take place after the first five years are completed.  These types of loans are best if you plan to live on the property for more than then years and if you can tolerate having an adjustment made to your payment amount one time.  Or, if you plan to move in seven or five years, depending on which type you select, this type of loan can be a good choice.

The seven year balloon mortgage maintains the same interest rate and payment amount for the first seven years.  After this period of time, the loan is due in full.  This means the borrower needs to refinance a new loan.  The same concept is true with the 5 year balloon mortgage.  This plan is good if you plan to live at the property for longer than the number of allotted years and are willing to refinance or if you plan to move when the payment becomes due.

Finally, you could choose to obtain the one year adjustable rate mortgage.  With this mortgage, the interest rate is adjusted every year.  This means the payments can change each month, though it can help you take advantage of lower rates when they occur. If you are willing to accept frequent rate changes, this might be a good option for you.

Although he or she cannot actually process the loan for you, you can provide your Realtor with some basic information in order to help you select a lender and the type of loan that is right for you.  Let your Realtor know how much you have in savings, how much your current debt is, what your income is, and the type of loan you want to acquire and he or she should be able to point you in the right direction so you can get the ball rolling and finally purchase that home of your dreams.

 

Eric Bramlett is the broker & co-owner of One Source Realty in Austin, Texas.  Eric currently manages his Northwest Austin real estate website, his Austin Texas real estate company's website, & his  Steiner Ranch real estate website. 

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