A Mortgage Guide for the First Time Buyer

If you’re preparing to buy your first home, congratulations! We couldn’t be more excited for you.

Homeownership comes with amazing perks. You can decorate, renovate, and update the home however you see fit. There are also BBQs, house warming parties, and most importantly, all the memories you’ll form under your new roof.

However, as a first-time buyer, you may not know much about the types of mortgages available to you. Yet, the mortgage you choose will significantly impact your life (namely, your finances) for the next several years.

We want to make sure you’re not in the dark. Keep reading for a mortgage guide for first-time buyers.

Your Credit Rating

First, let’s talk about your credit history and credit score. Your credit rating has a profound influence on what loans you can get approved for. It will also affect your loan terms and interest rates.

It’s important to understand that having a limited credit history can be just as hindering as having a bad credit score. Banks and other mortgage lenders use your credit score to determine your financial responsibility and reliability.

Fortunately, if you have limited or bad credit, you can build it up in a reasonable amount of time. Click here to find out how to boost your credit score quickly.

Types of Mortgages

Now, let’s talk about the various types of new mortgages available to first-time buyers. Keep in mind, that each type of loan has different pros and cons. Some are easier to obtain, while others have more favorable terms and rates.

Ultimately, you need to decide what’s best for you based on your qualifications and financial circumstances.

Fixed-Rate Mortgages and Adjustable-Rate Mortgages

One of the first things you need to decide when taking out a mortgage is whether you want a fixed loan or an adjustable-rate loan. A fixed loan provides you with an interest rate that’s locked in for the entirety of your loan, whether it’s 15 years or 30 years. You can, however, refinance in the future to obtain better rates (provided you qualify for better rates).

An adjustable-rate mortgage (ARM) usually offers the borrower a guaranteed low rate for the first few years. However, it is then liable to change based on the real estate market, economy, etc. Your rate can go up or down, which will affect your monthly mortgage payments.

Some people choose ARMs because they are easier to qualify for. Then, once their credit score is higher, they refinance under a fixed-rate mortgage.

Conventional Home Loans

Conventional mortgages, such as those offered at Farmers Bank, are perhaps the most attractive loans for first-time buyers and veteran homeowners alike. They offer the most secure terms and, typically, the lowest interest rates.

Of course, this luxury comes with a price – a high credit rating. Conventional home loans require a minimum credit score of 620. However, higher credit scores make you eligible for lower interest rates.

Lastly, conventional loans require a minimum 3% down payment, though most lenders prefer 20%. Any mortgages obtained with under 20% down will require the borrower to purchase mortgage insurance. This will add to your monthly payments.

FHA Loans

FHA mortgages for first-time buyers are an attractive option, especially for people who have limited or poor credit. These are government-backed mortgages allow buyers with credit scores as low as 500 to get approved for a new home.

Borrowers with a credit score below 580 must provide a 10% down payment. Borrowers with a credit score of 580 or higher only need to put 3.5% down.

Lastly, because FHA lenders assume some risk by catering to people with limited or low credit, mortgage insurance is required for all FHA mortgages.

VA Loans

Some first-time buyers qualify for VA loans. These government loans are reserved for people who are active duty, reserve, or veteran military personnel.

Borrowers can obtain VA loans with no down payment whatsoever, which makes these mortgages attractive. These loans also come with other benefits, such as:

  • Easier qualifying requirements
  • Better rates and terms
  • No mortgage insurance
  • Assumability
  • And more

If you qualify for a VA loan, it is definitely something you should look into.

Interest Rates

Now, let’s talk about some important factors of your new mortgage. First-time buyers need to be aware of how greatly their interest rates will affect their monthly payments and their long-term costs.

For example, let’s look at taking out a mortgage for $250,000. Let’s say it’s a 30-year loan with a 4.5% interest rate. Here’s what you’re looking at:

  • Monthly payments of $1,267
  • Total payoff amount of $456,017

Now, let’s say you spend some time boosting your credit score or find a lender with better terms. Let’s say you apply for the same 30-year loan at $250,000, but this time, you get a 3% interest rate. Here is the difference:

  • Monthly payments of $1,054
  • Total payoff amount of $379,444

As you can see, by taking out a mortgage with a lower interest rate, you can save $200 a month and roughly $80,000 over the life of the loan.

Loan Terms

Finally, it’s important for first-time buyers to understand how the length of your loan affects both your monthly payments and your overall payoff amount. Obviously, if you choose a 15-year loan or a 20-year loan over a 30-year loan, your monthly payments will be higher.

If you can afford a higher monthly payment, however, there are impressive benefits to choosing a shorter loan term.

Using the same example as above, we’ll look at a $250,000 mortgage with a 3% interest rate. Here are the numbers for various loan terms.

30-year loan:

  • Monthly payments of $1,054
  • Total payoff amount of $379,444

20-year loan:

  • Monthly payments of $1,386
  • Total payoff amount of $332,759

15-year loan:

  • Monthly payments of $1,726
  • Total payoff amount of $310,762

Once again, you can see that your saving are huge in terms of total costs. However, your savings increase even more if the interest rate is higher.

Are You a First-Time Buyer Looking for a Mortgage?

If you’re a first-time buyer searching for a new home, it’s imperative to explore your options for mortgages. Take your time to see what you qualify for in terms of loan types and interest rates. And remember, you can always refinance in the future if you’re forced to accept a loan with unfavorable terms.

In the meantime, if you want more mortgage advice, financial tips, or guidance in the home buying process, stick around. Our blog was created to provide answers and solutions for people like you.