Navigating the waters necessary to buy a home can be intimidating. It’s important to surround yourself with good help, like an experienced Indianapolis REALTOR® and mortgage representative.
Even though the economy is struggling, the Indianapolis real estate market is hot right now for buyers. With the $8000 First-time Home Buyer Tax Credit offered by the government and rumors there will be an extension of the tax credit to include any buyer, people are looking for more Indianapolis homes for sale, as well as in the rest of Indiana.
With so many first-time buyers seeking homes in Indianapolis, the following are a few mortgage basics to help you educate yourself with this part of the process.
One of the first things to know about when it comes to understanding mortgage basics is what type of mortgages are available.
Determining what you can afford to spend on a monthly payment is determined by what type of mortgage you can secure along with your interest rate and term, or length of your loan.
The typical lengths of a mortgage is 15 and 30 years, with 30 years being the usual choice. Interest rates can be adjustable or fixed. If you choose a fixed rate, you can be secure that your rate will not change over the life of your loan. If you choose an adjustable rate, the amount you pay will fluctuate as the market does. This can either benefit you or become a negative factor. It’s certainly riskier.
The most popular choice for mortgages remains the fixed-rate 30-year loan, most likely because this term lowers your payment and the interest rate ensures stability for the duration of the loan. Since we are seeing lower interest rates right now, these types of loans are appealing to those buyers who plan to remain in their homes for at least seven years or so.
Negatives to these types of loans are paying mostly interest at first and also the risk that rates in the market will decrease over the life of the loan. Refinancing becomes a good option in situations like these and if you have a good financial history and credit score.
With a 15-year loan, the interest rate is typically lower. It also reduces the total payments of interest and raises the payments toward principal. Obviously, a 15-year term is not the most popular choice for most buyers because it significantly increases the monthly payment.
One other way you can accomplish making payments on the order as though you had a 15-year term, when you actually have a 30-year term, is to make more payments toward the principal each month. Check first that you have no penalties for prepayment before you consider this option.
Adjustable-rate loans are a scary prospect for a lot of buyers, and rightly so. It’s hard to think about taking these types of additional risks on top of the biggest purchase you may ever make. But, if you are fairly certain that are only plan to live in your new home for less than three years, the adjustable-rate mortgage is a good option to consider.
Typically, adjustable-rate mortgages have lower interest rates at the beginning than fixed-rate mortgages. After the initial year, rates are usually then tied to changes in the market and therefore could increase. A cap is set for most adjustable-rate loans so that they can increase only so much each year and over the duration of the term.
These mortgage basics will help you get started on the path to being a new homeowner and be more educated as you pursue a loan.