Fixed-rate mortgage. With this kind of home mortgage loan, one pays off the mortgage over a fixed period of time and at a fixed rate of interest regardless of changes and trends that may affect rates of interest so that may they go up or down. Homebuyers can choose from loans paid over 10, 15, 20, 30 or even 50 years.
FHA mortgage. FHA loans are the other kind of home mortgage loan. They are insured by the government through the Federal Housing Administration. This is done through mortgage insurance which is funded into the loan. It is a good choice for first-time homebuyers who can take advantage of incentives like low or no down payments and lowered or no credit score requirements.
VA mortgage. The VA home mortgage loan is also government-issued. It is given to former US veterans and it may also be issued to the spouses of deceased veterans. The requirements are different and there are different criteria used to decide who qualifies for the loan. This includes factors like the years one served and if their discharge was honorable or not. The greatest benefit is that a down payment is not required. The Department of Veteran Affairs guarantees the loans but they are funded by a conventional lender.
Interest Only Mortgages*. Interest is charged on every kind of home mortgage loan. However, this loan is so-called because a borrower has the option to only pay the interest charged on a loan. This option is only available with this kind of loan and it is given for only a specified period of time.
There are also some junior mortgages that are interest-only where a borrower is required to make a balloon payment which is the amount borrowed which is calculated on maturity. The loan is also sometimes called balloon mortgage loans.
Understand the documents you sign. No matter what anyone tells you, the written terms are the most important. If you were promised something that is different from the purchase agreement, it can be costly and very difficult to undo. It is also important to have a realistic outlook of your finances. Purchasing property that is out of your price range can make payments a struggle and lead to foreclosure. If you are unsure, ask a financial professional or HUD-approved counselor.
Some of the most common problems resulting from buyers who do not understand the terms are:
Interest rate surprises - Be leery of a seller or lender who is not clear about the interest rate and if it is fixed or variable. Offers that overly-emphasize "low monthly payments" might not show the full picture. Variable interest rates can climb over time. Even a couple of percentage point increase in the interest rate could add hundreds of dollars to your monthly payment, especially in the beginning when you carry a large balance.
Skyrocketing payments and accumulating debt - Some lenders offer mortgages with extremely low introductory monthly payments. These offers are known as "exotic" mortgages. The reason your payments are so low initially is that the mortgage begins with a low-interest rate and your payments only cover part of the interest. Because the unpaid interest becomes part of the mortgage itself, and the interest rate rises, your payments may double or triple. Unless you make payments that cover the accumulating interest and pay off the principal you could find yourself building no equity and in a cycle of accumulating debt.
Undisclosed costs - Many home buyers discover months after the purchase that they owe hundreds or thousands of dollars in property taxes. Not all lenders roll property taxes into the monthly payment. Find out before closing whether the tax will be separate. You can approximate the tax by contacting the county's appraisal district. Most counties provide tax information online. For brand new homes that do not have a tax record, contact the appraisal district about property taxes on comparable homes in the same area.
Lenders require buyers to have homeowners' insurance. While some mortgages include homeowners’ insurance as part of the monthly payment, others require you to obtain and pay the premium separately.
Remember taxes and insurance can increase yearly, so even with a fixed interest rate your monthly payment may increase.
"Contracts for Deed" - Contracts for deed, sometimes referred to as "rent to own" financing arrangements, are legal in Texas. The important difference between a contract for deed and a conventional purchase contract is that under the contract for deed the buyer generally does not gain immediate equity in the property as he or she makes payments. Equity is the difference between the value of the home and the amount still owed. Under a contract for deed, the buyer only has an equity interest after they have paid 40% of the loan or more, or have made 48 monthly payments.
Generally, if the buyer provides a promissory note for the note's balance and a deed of trust, the seller must provide a warranty deed within 10 days or provide an explanation that legally justifies why the seller is not providing the warranty deed.
Contracts for deed can also have strict conditions. Some consumers with a contract for deed have lost their homes because they were a few days late on one payment. This meant that despite making timely payments for years, the contract forced them to leave the property with no stake in the investment. It is therefore critically important for you to know exactly what type of contract you are signing and to make sure you can meet all the conditions.
Refinancing issues- Consumers who refinance their home can get in over their heads by not reading the new loan's terms. Some loans advertise "low monthly payments" but have a variable interest rate which skyrockets after a few years. If you choose a loan with a variable rate, make the lender tell you what the monthly payments will be after the rate has adjusted several times.
Some refinancing companies may insist you use "their" appraisers, who may over-value the home. If you borrow more than the home's true value, you could be stuck making large payments or forced to sell your home for less than what you paid.
Many refinancing companies offer loans with a "prepayment penalty." This means to get out of the loan within the first few years, you must pay a large sum. Ask if this is included in your loan, and try to have it removed. Loans without a prepayment penalty give you greater flexibility to sell your home or refinance it during the first few years.
Avoid any lender who asks you to falsify income or asset figures on your loan application. Many lenders make legitimate loans based upon "stated" income (income for which you don't have any documentation). But if the loan officer suggests that you include phantom income, do not use them. You could face criminal charges for lying on a loan application.