What You Need To Know About Financing Your First Home

By Author: Lucy Carter
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Buying your first home is a big step and it can be tricky understanding the financial implications. The following guide will give you the key facts about mortgage loans to help you find the best deal possible.

Types of Mortgage Plans

All in all, the packages offered by different providers vary immensely, so it's important to research the many options available to you. This being said, there are two main types of mortgage loans:

Fixed Rate

These offer fixed rates of interest on your loan with set monthly payments and are common as 30 year or 15 year repayment plans. The 30 year mortgage is a good choice if you want lower monthly payments. The 15 year plan will incur a higher monthly payment but is beneficial in that it enables you to own your home in half the time, and for generally less than half the total interest costs of a 30 year loan.

Changing Rate

These types of mortgages vary widely and offer changing interest rates and/or monthly payment fees. One of the most common plans of this type is the Adjustable Rate Mortgage (ARM), which generally offers interest rates and monthly repayments ...
... that are initially lower than fixed-rate mortgages. These rates and payments can fluctuate up or down during the year however according to adjustments in the Bank of England rates, so their unpredictability runs the risk of giving a sudden shock to your budget. The main things to compare when looking at changing rate packages are:

- Initial interest rates charged.

- The "Cap" which sets a limit on the extent your interest rate can decrease or increase over the life of the loan, as well as on what degree the rate can change annually.

- How often the monthly payments and term of the loan can change.

- The index used to determine rate changes and the margin which calculates the additional fees the lender can add when the Bank of England interest rate changes.

- The loss of equity on your home when low monthly payments don't fully cover the interest rate charges agreed on in the mortgage contract.

- "Balloon payments" which entail whether there will be a large payment at the end of your loan term. These often occur after a series of low monthly payments.

APR

The most important detail to look at when deciding on a first time buyer mortgage is the Annual Percentage Rate (APR). This will encompass the costs of the loan as well as other charges such as mortgage insurance and interest. Generally, the lower the APR, the lower the full cost of the loan.

Downpayment and Closing Costs

Lenders will generally ask for an initial downpayment of approximately 10 - 20% of your properties full price. If your downpayment is less than 20%, lenders generally make it mandatory for you to pay private mortgage insurance. There will also be the fee of closing costs, which are usually 3 - 6% of the loan amount that you borrow.

The Mortgage Loan Amount

As a general rule, most people qualify for a mortgage loan of 2 - 2 1/2 times your household's income. Lenders also look at other factors to decide on your loan amount - among other things you will be a more favourable loan risk if your housing expenses (including insurance, taxes, mortgage repayments and special assessments) do not exceed 25 - 28% of your gross monthly income. Loan providers will also want to see your employment and credit history.

Shopping Around

Because mortgage packages can differ widely, it's wise to research several avenues to weigh your choices thoroughly. You might opt for a broker to navigate the complexities and advise you on what will suit you best. Beware though of affiliated brokers who have a set list of providers they get commission from, meaning they're not able to offer fully impartial advice. It's a good idea to check real estate or business newspapers for competitive deals on offer. Also use a mortgage repayments calculator to be clear on how much your monthly repayments will be. Above all it's crucial to compare several lenders to understand the different rates, terms and application fees they offer before you make your choice.

With the above advice, you should be well armed to start seriously weighing the first time buyer mortgages available to you on the marketplace. While it can be tough navigating the process and deciding on what's best for you, careful research will see you jumping on the property ladder with the right deal.
Sean Raston is an economics student and expert in first time buyer mortgages.