REAL TipS: BUYING

Learn about loans

If you are thinking about buying a home, you should take some time to familiarize yourself with the lending process and how different types of loans work. There are many kinds of loans; the one that makes the most sense for you depends on your current situation and your plans for the future.

A fixed-rate mortgage offers the same interest rate for the entire life of your loan. If you think you’re going to stay in this home for a period of, say, 10 years or more, this type of loan makes sense. It’s also a good option if you like payment stability. Fixed-rate loans can have different repayment terms, with 15, 20 and 30 year being the most common—the longer the terms of your loan, the lower your monthly payments. The tradeoff for these lower monthly payments is that you’ll build equity slower and end up paying substantially more interest.

An adjustable rate mortgage, or ARM, features interest rates that will change over the life of the loan, according to fluctuations in the market. An ARM will offer a lower interest rate than a fixed-rate mortgage for a stated period of time. After that, the interest rate will adjust and your payments can go up or sometimes down. This can be beneficial because you’ll qualify for a larger loan and begin with lower monthly payments. This may be an attractive option if you are planning to sell the house in a few years or if you’re sure you’re going to be making more money in the near future and will be able to handle the potential for increased monthly payments.

In a fixed period ARM, you may see numbers, such as 10/1, 7/1, 5/1, and 3/1. The number before the slash is the number of years your initial interest rate is locked. The second number is the frequency with which your interest rate will adjust after that initial period. In other words, on a 7/1 ARM, your interest rate would be locked for 7 years and would adjust each year thereafter.

Comparing ARMs can be complex. For more detailed information, including how interest rates are calculated in these types of mortgages, visit the ARM page of the Federal Reserve Board.

Educate yourself and evaluate your situation, then shop around for the best deal—don’t just take the first offer that comes your way. Your Texas REALTOR® can be a valuable resource at this stage in the game. As an expert in the field, a REALTOR® can help you understand the various loan products and lending sources, ensuring you have the knowledge to find one that fits your needs.

Texas Association of Realtors®