As a first time home buyer, you need to understand the mechanics of a good mortgage. If you've been looking for an article that helps with this, you have come to the right place.

In this article we'll discuss the mortgage process and how you can decide which product is best for you. There will be two primary things you will learn. First we will look at how mortgages work and then discuss the pros and cons of fixed rate mortgages versus the adjustable mortgage.

Understanding How Mortgages Work

It's kind of funny how people look at mortgages. We say "I need to get a mortgage from the bank". Actually you cannot get a mortgage, you will give a mortgage or pledge a mortgage to a lender. Does this mean you are the bank or what?? Not really, it's matter of understanding the proper terminology.

When you buy a home, you sign a ton of documents. I often said when I was closing mortgages that a few trees were sacrificed for this since it involves so much paper work. There are two very important documents in this stack of papers. One is the "note" and the other is the "mortgage".

The note is your IOU which states you owe a debt to the lender and promise to repay. The mortgage is the legal document that secures the note.

So you want to look at it this way: When a bank loans you money to buy a home, you "give" or "pledge" a mortgage to the bank. The bank will hold this mortgage as a legal claim in case you default and stop making payments on the note. It's kind of a guarantee you will live up to the terms on the note you signed. So in other words, if you don't pay, you don't stay. The bank will force a foreclosure on you and take back the house.

Pros and Cons of Fixed Rate Mortgages

In the mortgage industry, the fixed rate loan has been labeled as the "vanilla loan" because there is nothing fancy about it. It has a set rate of interest and you will know what your principal and interest payment will be for the entire term of the mortgage. There are 10, 15, 20 and 30 year fixed rate mortgages out there.

The biggest advantage of the fixed rate loan is the fact you have permanently locked into a mortgage payment that you can count on never changing. This helps to eliminate any surprises for later, like when interest rates go up. If that happens, your payment stays the same.

Personally, I believe the fixed rate mortgage is the best choice for first time home buyers. You can budget your payment this way and plan for your future. Keep in mind I did not talk about taxes and insurance which are the other part of your payment. If you used the minimum down payment (3.5% for FHA) then you will be forced to escrow your taxes and home owners insurance. This part of your payment can fluctuate each year.

Adjustable Rate Mortgages - Are They Right For You?

Unlike their cousin the fixed rate mortgage, the name of this loan product implies that it features a variable interest rate. These rates change or "reset" over time. Because of this, the principal and interest portion of your mortgage will change according to the terms of the note.

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