Fixed rate. Adjustable rate. Interest Only. Flex. All of the different types of home loans that are available these days can puzzle many homebuyers. But, say mortgage experts, virtually every home loan is one of two types: a fixed rate loan or an adjustable rate loan.

Before you start looking for a home, make sure you understand the pros and cons of each type of loan. Here are the basics you need to know.

• Fixed rate loans. With most fixed rate mortgages, your monthly principal and interest payment will not change for the term of the loan, regardless of whether interest rates rise or fall. In exchange for that stability, you may have a higher interest rate than you would with an adjustable rate loan. Fixed rate loans are available with different length terms and usually, the longer the term, the lower your monthly principal and interest payment will be.

• Adjustable rate loans. Many people who choose adjustable rate mortgages also qualify for fixed rate loans. However, the lower initial interest rate of adjustable rate mortgages and the opportunity to take advantage of lower monthly principal and interest payments have made home ownership more accessible to more people. With most adjustable rate mortgages, your interest rate is fixed for a set period of time and then begins to adjust for the rest of the loan’s term.

Mortgage professionals suggest you keep a few key tips in mind when navigating the various mortgage product choices.

• First things first. People looking for a home tend to focus on finding a home before they think about what kind of mortgage they’ll get. That could be a mistake, said Tony Meola, executive vice president of home loans production for Washington Mutual. “Many people look at the mortgage as secondary in the home buying process, when that’s really where they should start,” he said. “A mortgage professional can tell homebuyers how much home they can afford before they start shopping.” That, said Meola, can save both time and heartache by making sure homebuyers don’t fall in love with a house they can’t really afford.

• The low-down on down payments. Meola said that the amount of money a buyer needs to put down on a home in order to buy it is one of the most misunderstood concepts in home buying. “Some people think they need to make a down payment of 50 percent of the home’s price,” he said. “But most loans are based on a 20 percent down payment.”

• Check the amortization schedule. How long will it take to own the home? Home buyers can discover a lot about a loan by reviewing its amortization schedule, which tells you exactly how much of each mortgage payment is going towards interest and how much is going towards principal.

• Affordability. Be sure to keep in mind both your mortgage payment amount immediately after buying the home and what it might be in the future. Of course, if you choose a fixed rate loan, the principal and interest payment never changes. But if you choose an adjustable rate loan, you need to ask yourself if you will be able to afford the payments in the future.

• Understand negative amortization. Some home loans offer attractive monthly mortgage payments but at times those low payments don’t cover the interest portion of the loan. When that happens, part of the principal amount is deducted, resulting in what lenders call “negative amortization.” Simply put, it means you are losing equity in your home.

• Get expert help. With so many options, the lending process can mystify anyone. Lending professionals, such as qualified lenders or mortgage brokers can help you review your options so that you can select the right mortgage product based on your financial situation and long-term goals.

— ARA Content

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