While the deep recession that started in 2007 eliminated many mortgage-loan products, there are still a variety of home loans available to first-time homebuyers. Like most product options, all choices are not created equal. First-time homebuyers, because they lack real estate experience, will benefit from some loan types more than others. In this case, the lack of creativity and complexity is a positive feature.
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Fixed-Rate Loans
The classic fixed-rate mortgage is often the best option for first-time homebuyers. The primary benefit for all homeowners lies in the fixed interest rate, which will not change over the life of the loan, typically 15 or 30 years. Homeowners need not worry about inflation, rising interest rates, or recessions. Their monthly payment for principal and interest will remain constant. That part of the payment affected by taxes and insurance usually fluctuates from year to year.
Three- or Five-Year Adjustable-Rate Loans
These loans do re-price (adjust) at the intervals prescribed but then become fixed for another equal period (three or five years). They offer some consistency in interest rate and payment amount. With longer re-pricing intervals, homeowners have time to make sell or refinance decisions without worrying about imminent interest rate and payment increases, allowing borrowers to better plan their financial future.
2/28 or 3/27 Mortgage Loans
These options require careful study. First-time homebuyers who plan to keep their starter house for only a short period (two to three years) can find good benefits in these loans. The interest rate and monthly payment is fixed for either two (2/28) or three (3/27) years with a fully amortizing 30-year note. However, after the initial fixed period, these loans become subject to either one-year or six-month rate adjustments. Should a homeowner keep the home longer than the initial fixed period, she may receive regular, unpleasant surprises in a rising-rate environment.
Fixed-Rate Balloon Loans
Like the 2/28 and 3/27 loan products, these mortgage loans fit some home buyers' circumstances better than others'. Balloon loans offer the benefit of good interest rates and consistent monthly payments over the life of the note. However, even though the monthly payment is calculated on a long-term amortization, typically 30 years, the note comes due in a much shorter period, often five, 10 or 15 years. For homeowners who own their house for shorter periods (or plan to refinance within the note term), these may be the best loans. However, should a homeowner experience dramatic negative changes in income, employment or cash flow, an upcoming balloon date may prove disastrous, as they may be unable to refinance or sell before the note comes due.
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