The Basics Of Home Loans For First Time Buyers

Buying a house is the biggest purchase most people will ever make, and almost everyone needs a loan to complete the purchase.

The last thing you want to do is go into a closing or escrow, sign a huge pile of papers, and not really understand the details of your loan. You may not get much of an explanation about loan details or your loan choices from your Realtor or your lender, since they are usually buried with so many details already. I'm offering some basics here to help you along.

Fully Amortized

This is a loan that is calculated to pay off in full over the term of the loan. The principal amount of the loan (the amount you borrowed) is reduced by a certain amount with every payment you make. The remaining amount of each payment goes toward interest (and property taxes and insurance if these are paid through your loan).

Interest Only

A loan that involves paying only interest, and not principal. The balance of the loan is not paid off during the term of the loan. Interest only is a poor choice for most people, particularly first time buyers.

Loan Term

Most loans are either 30 years or 15 years. This just means that if you make all payments on time and in full, your loan will generally be paid off at the end of the loan term of 30 years or 15 years, whichever the case may be. If you want to keep your payments down, a loan term of 30 years is a good bet. If you want to be out of debt sooner and can afford the higher payments, 15 years is good.

If you ask, most lenders will give you payment amounts for both terms so you can compare. The interest rate for a 15 year loan is generally lower than the rate for a 30 year loan.

Fixed Rate Mortgage

This type of loan has a fixed interest rate that doesn't change over the term of the loan. If it starts at 6.5% interest per year, it stays at 6.5% interest.

Adjustable Rate Mortgage

An adjustable rate mortgage (also known as an ARM) is a mortgage where the interest rate can change over the life of the loan.

ARM loans generally have a lower initial interest rate than a fixed rate mortgage, and the rate is usually fixed for an initial period, commonly (but not always) three years. Most ARM loans also can't increase more than a certain percentage in a given year, and can't increase more than a certain percentage rate in total over the life of the loan.

If you are interested in an ARM, be sure to find out what the initial interest rate is, how long the initial interest rate is fixed, the maximum the rate can increase in one year, and the highest that the interest rate could go over the life of the loan.

Property Taxes and Insurance

Depending on the kind of loan you have, most lenders will pay your property taxes and insurance on your behalf. To do this, they collect 1/12 of the combined annual amount every month with your payment. This goes to your escrow account, which contains the money you have paid in for property taxes and insurance. Normally you will receive an annual statement from your lender telling you how much was paid out for taxes and insurance on your behalf, and how much you paid in.

PITI

Most payments include what is called PITI. This stands for Principal (the amount of your payment which goes to reduce the amount you owe on your loan), Interest (the amount of the payment which goes toward interest on the loan), Taxes (normally 1/12 of the annual property taxes on your property), and Insurance (1/12 of the annual cost of your property insurance policy).

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