What is the Best Mortgage Option for a First-Time Homebuyer?

Whenever you want to buy your first home, you will be hearing the word ‘mortgage’ a lot. But what is a mortgage and why would you need it? Even once you figure that out, there are tons of mortgage options and it is very easy to get overwhelmed as you wade through the choices. There are several different ways to go about finding the proper mortgage, and knowing the correct ways to handle getting the mortgage could save you some money.

What Is A Mortgage?

A mortgage is a loan that you as a borrower would use to purchase your home. Most people searching for their own home need the help of a mortgage to purchase it. Typically you will put down a percentage of the purchase price upfront, and then pay back the rest of the money over time with monthly payments.

Mortgages are available in several options, including mortgages that have fixed rates and mortgages that have rates that are adjustable over time. How much you will pay over the course of the loan is dependent on the type of the loan, the length of the amortization (or payback) period, and the interest rate that is charged by the lender.

How Is A Mortgage Loan Priced?

The lender for the house you want to buy will determine the price in two ways. First, they want to check your FICO credit score, and they will also look at your loan-to-value (LTV) and debt service coverage ratio (DSCR). Both of these will help the lender determine your willingness and ability to pay.

The LTV compares the size of your mortgage loan to the value of the home. The higher the LTV is, the greater the risk for the lender. If you make a larger down payment, that can mitigate a high LTV.

The DSCR shows your ability to pay. To calculate the DSCR, lenders will divide your monthly income by the mortgage costs to look at the chances of you defaulting on the mortgage. The lender takes on less risk when the ratio is higher, indicating that you are less likely to miss payments. The lender might even negotiate a lower rate for you as well, because they still receive a risk-adjusted return.

Types of Mortgages

There are several types of mortgages that a lender can give you, and the first major difference is the time limit of the mortgage. The common types of mortgages are 30 year and 15 year mortgages that have a fixed rate. Other mortgages can be as short as five years or as long as 40 years, and it all depends on what you and the lender decide.

If you have a fixed rate mortgage, then the interest rate and monthly payments will be the same over the life of the mortgage, excluding changes in other costs such as real estate taxes and insurance. If you get an adjustable rate mortgage, then the interest rate will be fixed for a term before changing based on the prevailing interest rate.

Which One Is The Best For A First Timer?

For someone new to buying and owning a home of their own, you need to take a look at your budget. Figure out what you can afford, both in terms of a home and in terms of a loan, and then look at your options. Depending on what you put down for your home’s down payment, you could get lower interest rates.

Getting a smaller loan with a fixed rate is often the best for the first time homeowner. It will help you make sure that your payments are always the same, without any interest rate surprises. If you have a good mortgage broker, they will be able to help you decipher the mortgage options you have.