Piecing Together the Mortgage Puzzle
Whether you’re buying your first home or your third, you’ll most likely have to get a home loan, commonly called a mortgage. There’s a misconception out there that a minimum of a 20 percent down payment is needed to buy a home, but that’s 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 percent. However, if you’re borrowing more than 80 percent of the home’s value you’ll probably end up paying mortgage insurance premiums or private mortgage insurance, which adds a small amount to your monthly payments. Then there’s the question of whether to apply for 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 will remain constant for the life of the loan. Even if mortgage interest rates skyrocket 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 it easier to plan for other things. Fixed rate mortgages are easy to understand and there’s not much of a difference in fixed rate mortgage products from lender to lender.
Adjustable Rate Mortgages
The Adjustable Rate Mortgage (ARM) is a more complicated loan, but for many people, an ARM is more desirable because of the low interest rate. Most ARM interest rates are fixed for the first few years, and after that the interest rate might increase or decrease several times over the life of the loan. With a large loan, your monthly payment could increase by hundreds of dollars. Most ARM products come with maximum caps on periodic interest rate. Unlike fixed rate mortgages, there are several different ARM choices from which to choose.
Types of Home Loans
A conventional mortgage is not guaranteed or insured by the federal government. Also known as a conforming mortgage, a conventional mortgage may be either fixed rate or adjustable rate. If you choose a conventional mortgage, you should know that lenders require different minimum down payment amounts than government loans. This could be as low as 3 percent – and as much as 20 percent – of the purchase price. A mortgage broker can help you figure out how much your down payment will be.
If you are a first time buyer or have owned a home before and have less than perfect credit, an FHA loan may be the right choice for your financing. An FHA Loan is administered by the Federal Housing Administration. These loans are insured by the government and are often the easiest to get if you have less-than-perfect credit. The minimum down payment for an FHA loan is 3.5 percent.
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 Veterans Affairs.
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.
Georgia Dream Home Loan
It is a fantastic loan for those who need down payment help as the interest rate is very low. This is a loan through the State of Georgia’s Department of Community Affairs. Not every lender wants to or can do these loans well but we have lenders who are very knowledgeable and have helped many of our homeowners move into their homes already. Please call us for more information or visit the Georgia Dream Program Website.