Thursday September 3, 2015
Piecing Together the Mortgage Puzzle
Whether you’re buying your first home or your third, you’ll most likely have to get a mortgage. There’s a major misconception out there that a minimum of a 20 percent down payment is needed to buy a home, and that’s just not true. With a good credit score and debt-to-income ratio, you can get a home with a down payment as low as 3%. What often comes to issue is whether you’ll take a mortgage with an adjustable interest rate or fixed interest rate. Each type has its pros and cons. Let’s explore them further.
Fixed Rate Mortgages
The key to fixed rate mortgages is predictability. The 30-year fixed rate loan is the most popular mortgage since monthly payments will be lower. A 15-year mortgage will carry a better interest rate, but principal payments are going to be higher. Whether it’s a 15, 20 or 30-year loan, principal and interest payments are going to remain constant. Even if mortgage interest rates skyrocket to 14 percent in the future, you’ll remain protected.
This predictability also makes monthly budgeting easier. You’ll know exactly how much you will be spending every month for your home, which makes planning for other things in life a breeze. Fixed rate mortgages aren’t difficult to understand, and there’s not much of a difference in fixed rate mortgage products from lender to lender. If interest rates are high though, fixed rate mortgages become more difficult to qualify for because payments are going to be higher.
Adjustable Rate Mortgages
The Adjustable Rate Mortgage (ARM) is a much more complicated loan, but for many people, an ARM is easier to get into because of the low interest rate. Most ARM interest rates are fixed for the first five to seven years, and then after that the interest rate might change several times over the life of the loan. With a large loan, that could be risky business. Most ARM products now come with maximum caps on periodic interest rate changes and the ultimate interest rate you might have to pay. Unlike fixed rate mortgages, many different ARM choices are available.
Which is the Right Mortgage Type?
When you select a mortgage, we need to balance our personal considerations with constantly changing economic factors. When considering an ARM, affordability of future interest rate increases needs to be calculated. It is also important to question how long we plan on living at that home. If it’s a five-year maximum, the decision on an ARM becomes easier. If it’s until the kids are out of college, the security of a fixed rate mortgage could suit your needs. Whatever type of loan you choose, you need to give it careful consideration.
What are the Different Types of Home Loans?
Now that we’ve gone through the difference between a fixed rate mortgage and an adjustable rate mortgage, let’s explore the types of home loans that you may be interested in pursuing, and how much of a down payment is required by each.
- Conventional Mortgage – A conventional mortgage is one that is not guaranteed or insured by the federal government. Also known as a conforming mortgage, the conventional mortgage is backed by Fannie Mae or Freddie Mac and may be either fixed rate or adjustable rate. If you choose a conventional mortgage, you should know that they require different down payment amounts than government loans do.
- Most conventional mortgages require the buyer to put down between 10-25% of the purchase price as a down payment. Fannie Mae and Freddie Mac have recently reduced the minimum down payment amount to 3% of the purchase price, which is a great option for first-time home buyers. On the other side of the spectrum, a credit-challenged borrower may be expected to produce a down payment of up to 35% in order to receive a conventional mortgage.
- FHA Loan – An FHA Loan is administered by the Federal Housing Association. These loans are insured by the government and are often the easiest to get if you have less-than-perfect credit and a smaller down payment, usually around 3.5%. But, there are income standards as it relates to verifiable income, so make sure to ask your lender about the specifics.
- VA Loans – VA Loans are home loans for individuals who have served or are currently serving in the U.S. Military. These loans do not require a down payment and are backed by the Department of Veteran Affairs.
- USDA Loans – USDA loans are offered to rural property owners and are backed by the United States Department of Agriculture. Those who qualify for this type of home loan are not required to produce a down payment, but there is a maximum income requirement and you may only be eligible for it if you are purchasing a home within a rural area as defined by the USDA.
Are you ready to put your loan knowledge to use and purchase a home? Feel free to contact a Smith Douglas New Home Specialist for information on our preferred lenders who are happy to have a phone consultation with you as you explore your mortgage needs.