Home Financing Options for Borrowers

This article explains the financing options that are available to a first-time home buyer. We will talk about the different ways to finance a home, the pros and cons of each method, and other important topics for buyers.

Home Financing Defined

Within the context of this article, home financing refers to the mortgage loans people use to buy a house. This is one of the most important topics a first-time buyer must understand. It's also where a lot of people make big mistakes, by choosing the wrong kind of loan for their situation.

With that basic definition out of the way, let's talk about the different types of loans you can use to finance your home purchase.

Different Ways to Finance a Home

Understanding your home financing options is the first step to making a smart choice. So before we go any further, we need to talk about the different kinds of mortgage loans that are available to you. These days, most home loans fall into one of two categories. They are either fixed- or adjustable-rate mortgages. The primary difference between them has to do with the interest rate, and how it behaves over time.

With a fixed-rate mortgage loan, the interest rate you have at the beginning of the loan is the same rate you'll have at the end of the loan (when you either sell the house, refinance the mortgage, or pay the loan off entirely). This is the primary benefit of this financing option -- there are no surprises later on down the road. The initial rate you obtain follows you for the entire life or "term" of the loan.

Here are some related articles to help you learn more about this topic:

As the name implies, an adjustable-rate mortgage loan (ARM) works much differently. With this home financing strategy, the rate will change at a specific interval -- usually every one to five years. When used properly, an ARM loan can save you money in the short-term. When used incorrectly, they can bring a lot of risk into the equation. Adjustable mortgages are rarely a smart option if you plan to stay in the home for a long time. In that kind of long-term scenario, a fixed rate loan is a better financing option for you.

Most of the adjustable mortgages in use today start off with a fixed rate for a certain period of time. After that introductory stage, however, the rate will begin to adjust or "reset" at specific intervals. Because of this, they are also referred to as hybrid loans. A person who only plans to live in a home for a few years might use an ARM loan to save money in the short-term. But once you get past the fixed stage of the loan, you have no idea what the rate will do (aside from changing in some way). If the rate adjusts upward by several percentage points, it could significantly increase the size of your monthly payment.

Remember, the interest rate is part of your overall mortgage payment. So when it goes up, your payment goes up as well. Depending on how much the payment increases, this could make the loan unaffordable for you. This is a very real risk that comes with this particular home financing option, so it's a risk you need to take seriously.

If you think you might use an ARM loan to finance your home purchase, you have plenty of homework ahead of you. Here are some related articles to get you started:

More information about adjustable mortgages

Many first-time home buyers use FHA home loans as a financing option, and there are several key reasons for this. For one thing, a home buyer who uses an FHA loan can make a smaller down payment (when compared to someone who uses a conventional loan). Generally speaking, FHA mortgages are easier to qualify for, as well. This makes them popular among people with less-than-perfect credit. These two factors combined to make the FHA loan one of the most popular home financing options for first-time buyers.

If you want to finance your house with this type of loan (or simply learn more about it), you'll find the following articles helpful:

Choosing the Best Option

These are some of the different ways you can finance a home purchase. So which option is right for you? In reality, there is no way I can answer this question for you, because I simply don't know your situation. Depending on (A) your long-term plans, (B) your financial situation, and (C) your level of qualification, one financing option may be better than another. What you must do, as a home buyer, is learn about the pros and cons of each strategy. Once you do that, one option should emerge as the obvious choice for you.

For example, we talked about the primary differences between fixed and adjustable-rate mortgage loans. If you plan to stay in the home for many years, the fixed-rate loan is probably the best option for you. This method of home financing gives you the most predictability over the long term. No matter what happens with the economy, you'll know that your interest rate will always stay the same. On the contrary, the interest rate on an ARM loan will change periodically. So it might not be the best finance strategy for a long-term stay. This is a prime example of choosing the best type of mortgage based on your particular situation.

This is obviously a "top-level" guide to home financing options, and that was my purpose. I wanted to give you a brief overview of the various ways to finance a home, and then provide you with some links to related information. I've hand-picked a few articles that will make a good follow-up to this one, and I highly recommend you read those as well. You can find these articles through the hyperlinks spread throughout this lesson.

I hope you've found this guide to home financing options helpful, and I wish you well in your future real estate endeavors.