As you get ready to buy your first home, it’s easy to become overwhelmed by the mortgage loan options for homebuyers. The type of home mortgage you get will have a big effect on how much you pay now and over the lifetime of the loan. The following mortgage loan options are a simple overview of what you may want to discuss with a mortgage broker and can help guide your home-buying decision.
Fixed Rate Mortgage
Fixed rate mortgages are the most common type of home mortgages. The interest rate stays the same throughout the lifetime of the loan, and people are typically able to choose between a 15- and 30-year loan term. This is typically a good choice for people who plan to stay in their homes a long time and who prefer knowing exactly how much they’ll pay from month to month.
Adjustable Rate Mortgage
Adjustable rate mortgages typically start out with a lower rate than fixed rate mortgages, but the rate changes after a few years. Sometimes, the rate increases dramatically, and the homeowner struggles to make the new monthly payment. These are a good option for someone expecting to move or refinance after a few years. If you’re choosing an adjustable rate mortgage, be sure to read the fine print and have a discussion with a qualified mortgage loan professional. Know when the rate could change and crunch some numbers to get an idea of how much more you could be paying.
Conventional Mortgage — 20% Down
The term “conventional mortgage” refers to any type of mortgage that goes through a bank and is not backed by the government. When you’re able to put 20% down, you’re in a good position to get this type of mortgage. It could be either a fixed or adjustable rate mortgage, so discuss the details with your mortgage broker.
Conventional Mortgage — 5% Down
Conventional mortgages are still available to people who don’t have the full 20% down payment. You’ll need at least 5% to qualify, but can put down any amount between the 5 and 20%. When you have less than 20%, though, you must pay a private mortgage insurance fee (also known as PMI). This is a small monthly fee that helps the lender recover money should you default on the loan. Once you’ve paid enough of the principal balance to reach 20% equity (home value appreciation can also add to your equity spread), you will no longer have to pay this fee. Remember to discuss the specifics with your mortgage broker.
Conventional mortgages typically have a limit of $417,000, although the limits are higher in certain high-value markets and are subject to change. If you are looking to buy a home that’s more than this amount, you’ll need a jumbo mortgage. Since they deal with a lot more money, jumbo mortgages typically have stricter requirements for down payments and income.
The U.S. Department of Veteran’s Affairs offers VA home loans to service members, veterans, and surviving family members who qualify. This type of mortgage requires no down payment, and you won’t have to pay private mortgage insurance. Rates can sometimes be higher than conventional mortgages, so if you do have some money for a down payment, it’s smart to shop around. The loan may also be assumable, which, if interest rates were to rise might be a good thing for a creative seller. Talk to your mortgage broker about specifics.
FHA loans are backed by the Federal Housing Administration in an effort to encourage homeownership among those who have mediocre credit or who don’t have a large down payment. With an FHA loan, you’ll only need 3.5% for your down payment. You’ll still have to pay private mortgage insurance, and the catch with this type of loan is that you aren’t able to drop that payment once you reach 20% equity. These loans are a good way to get into a home if you are a moderate-income family, but you should compare the rates with other types of mortgages if you qualify. If this sounds interesting, talk to your mortgage broker about how this might fit your situation.
Reverse mortgages are only available to seniors who are 62 years of age or older. They offer a way to take advantage of equity in a home you already own because you don’t have to make monthly mortgage payments. Interest continues to accrue, but you don’t have to pay the balance until you sell the home — typically after death or when moving into senior housing. It can be risky in that it’s possible for the principal balance and interest to exceed the value of the home.
The best way to understand which type of home mortgage is right for you is to speak with a qualified mortgage broker or loan officer. I would be happy to refer you to a number of well qualified loan professionals who can speak to this topic in detail and address your specific situation. Also please reach out to me if you’re ready to start looking at homes, and I’ll put you on the right path.