There are a few options when it comes to taking out a mortgage. No matter what type of loan you choose to get, you need to properly research it so you fully understand the terms and conditions.
You will also want to research your lending institution to ensure they are a solid financial center and to learn whether they deal with customers properly.
Kinds of Loans
One type of loan you may not know about is the 50-year loan. As the name connotes, you can make payments over forty to fifty years for your lakeside home.
While it feels like you are making payments for your entire life, it does give you the opportunity to lower your payments each month to a more affordable rate.
The most common type of mortgage is a classic 30-year, fixed rate, amortized loan, where payments first go towards interest, then later towards the principal. Also popular is the same type of loan paid back over 15 years. This reduces the overall amount of interest you pay over the life of the loan.
All loans are evaluated for whether they conform to the Fannie Mae/Freddie Mac underwriting guidelines. If the loan meets their terms, it is called a conforming loan, and if it doesn’t, it is a non-conforming loan.
The typical amount that qualifies as conforming is under $417,000, except in Alaska and Hawaii where the amount is more. This amount can change based on the changes in the market.
Non-conforming loans will typically have a higher interest rate, so if you don’t have to have such a large loan amount, you can save significant sums over the long term.
Who backs the loans?
A conventional loan is not guaranteed by the government, but an FHA (Federal Housing Administration) loan is. Some loans are also issued by the Veterans Administration for veterans to be able to get an affordable home loan when they no longer want or qualify for base housing.
What should I steer clear of?
Some of the more questionable types of loans include the 5/1 adjustable-rate mortgage, which las a low, locked in rate for the first five years, but after that the rate varies. In many cases this leads to a dramatic increase in your monthly payment as a result of a higher interest rate.
One type of loan that was more common pre-recession is a zero-down loan, leaving the entire amount of the home value to be financed. The risk from these types of loans was great, and defaults on them comprised one of the triggers of the great recession.
If you are interested in taking out a mortgage to either buy a vacation retreat or for your first home, be sure you talk to a financial expert who can help evaluate your situation and help you determine how much you should try to get a loan for.
Matching your home to the amount you can afford is a science, but it’s a step well worth taking.