Congratulations! You’re going to buy your first home, so you’ll need one great big loan – usually a mortgage - to pay for it. Hopefully you’ve already checked off the key factors you need to take this big step: good credit (if you’ve got bad credit take the time to bolster it up, it’ll save a lot of time and heartache!), a steady job, and a nice chunk of cash for your down payment.
When it comes to mortgage loans, there is no ‘one size fits all’ solution. While some options are better for the first time home buyer, you still need to choose the best lender and the best loan for your specific needs – taking into account your finances and your short and long term goals.
An Open Mortgage lets you can pay any amount toward your mortgage at any time. So you can pay off your mortgage in part or in full whenever you want with no penalties. You can also renegotiate the mortgage at any time. While it offers flexibility it has a high interest rate. If you plan to sell your home in the near future this may be a good choice.
A Closed Mortgage has set payment at set times. If you want to pay more, renegotiate, refinance, or transfer your mortgage before the end of your term, you must pay ‘prepayment compensation’. A closed mortgage carries a lower interest rate, and may be more attractive to a first time home buyer.
A Fixed Rate Mortgage means your mortgage rate and payment stays the same for the term of your mortgage. It does carry a slightly higher rate, but you never have to worry about changing interest rates. This is a good choice for a first time home buyer.
With a Variable Rate Mortgage the interest rate changes with the prime lending rate set by your lender. This usually won’t affect the amount you pay each month. It does, however, change the portion of your monthly payment that goes toward interest costs or paying your mortgage. If interest rates go down, you pay your mortgage faster. If they go up, it will take longer – and cost more.
A Protected/Capped Variable Rate Mortgage has a variable interest rate with a maximum rate that you and your lender determine in advance. That means if the market rate goes above that chosen market rate, you only have to pay the pre-determined maximum rate – no more.
A good option for a first time home buyer is the Adjustable Rate Mortgage due to its low interest rate and low payments. The initial rate and payment amount is set for a limited period – one month to five years. The mortgage is then adjusted to a new rate with new payment terms at the end of that term. If you plan to stay five years or less in your home, it’s a good deal.
Depending on your lender, you may be able to get a Collateral Mortgage. It lets you borrow money from your home during your mortgage term, without having to refinance and pay legal fees. The catch is you can’t transfer this kind of mortgage to another lender even at the end of your term.
By the way, banks aren’t the only ones who offer loans to help people purchase a home. Private Mortgage Lenders are becoming more popular. They differ from banks in that their money comes from private investors or a group of investors. Private mortgage lenders also focus more on the property you’re buying, than on you the borrower: the property’s condition, its location, how easily it can be sold. These loans usually have a higher interest rate, along with other fees. Unless you need to go private, this may not be the best choice for a first time home buyer.
If you want or need to go private, use a Mortgage Broker. They specialize in mortgages and only deal with lenders who can compete against the established financial institutions for better rates, terms, and service. Make sure to get one with good references and a proven track record.
As a first time home buyer, carefully consider all your options for a mortgage or loan. This is probably the biggest purchase you’ll ever make. Take the time to get all the information you need – don’t rush it – then, and only then, make the choice that’s best for your specific needs in both the financing, and in a lender. Good Luck!