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What Type Of Mortgage Is Best For Me? There are many different types of mortgages that you may choose from. Each one is simply a different way of borrowing money to fund the purchase of your home. Which type you choose, usually depends on the length of time that you think you will be living in your home combined with other financial obligations you may have. For example, if you think you will be in your home for the long haul, you may want a fixed rate mortgage with the lowest interest rate you can get. However, perhaps you have children who are going to be entering college in 10 years. In that case, an adjustable rate mortgage or a mortgage with a balloon payment might be a better option because your payments will be low so you can save money for college. Once the kids are out of college, you could refinance at the current rate. Some mortgage options are less conservative than others so it is also important to determine if you are a risk-taker or if you prefer more stability in your financial dealings. For example, fixed rate mortgages can save you many thousands of dollars in interest payments over the life of the loan but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage, but you take the risk of your payments increasing when the interest rate changes. 1. Adjustable Rate Mortgage (ARM) – An adjustable-rate mortgage has an interest rate that changes based on market rates and economic trends. ARMS typically begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, but they do not offer the stability or assurance of a known mortgage payment in the years to come. The adjustable-rate mortgage may be best if: · you are buying your home while interest rates are high · you do not expect to be living in your home for many years · you expect increases in your income/salary How often your interest rate adjusts is determined by the terms of the loan you choose. Terms of ARM’s range from 6 months to 1, 2, 3, 5, 7 and 10 year terms. Initially, the rate of your ARM will not change and at the start of the loan, your monthly payment is also fixed. The rate is based on an index such as: Prime Rate, Treasury Bills, COFI (Cost of Funds Index), LIBOR, Certificates of Deposits (CDs) plus a margin of generally 2-3 points. However, because interest rates for ARMs are tied to these indexes, your mortgage rate will rise or fall to reflect current market interest rates after the initial fixed period. “Caps” will limit the amount your lender can increase your interest rate in a single year and over the entire term of the loan. Check out Ideal Financial's "80/20 Loan Program". Advantages to an adjustable rate mortgage: · Lower monthly payment at the beginning of the loan · Rates and payments may go down if rates go down · A borrower may qualify for a larger loan Disadvantages to an adjustable rate mortgage: · Higher risk · Payments may rise as rates rise 2. Balloon Mortgage – A balloon mortgage offers an initial interest rate that is lower than fixed-rate mortgages. They are short term mortgages that keep the lower fixed rate for 3, 5, 7, or 15 years and then require a balloon payment or the final payment where the entire principle or balance is due. In most cases the payment is amortized over a 30-year period. The Balloon Mortgage may be best if: · you plan on selling your home, paying it off or refinancing before the balloon payment is due · you are a first-time home buyer with a growing family (requiring a larger home before the balloon payment is due) · you expect to be relocated by your employer or anticipate moving in 5-7 years At the end of the loan term, there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing at the then-current interest rate. Many lenders have options such as a conversion feature at the end of the term, which allows you to convert to a fixed-rate mortgage provided that certain criteria have been met. The balloon mortgages have been most common for a conforming first mortgage, however non-conforming has started to offer many balloon options on second mortgages. Check out Ideal Financial's "No Income Verification Loan". Advantage to a balloon mortgage: · Monthly payments during the mortgage term are lower than they would be for a traditional 30-year fixed-rate mortgage Disadvantage to a balloon mortgage: · The final lump sum payment is due at the termination of a balloon mortgage 3. Fixed Rate Mortgage – The fixed-rate mortgage offers an interest rate that is locked in when the mortgage is secured and will never change over the entire life of the loan. Traditionally, a fixed rate mortgage is one of the most popular types of mortgages because the interest rate and monthly mortgage payment remain the same and the borrower knows exactly what their monthly costs will be over the life of the loan. 15 and 30 year fixed rate mortgages are most common terms, but they can also be done as a 10, 20 or 25 year fixed. Rates improve as the term of the loan shortens because the risk to the investor decreases. Advantages to a fixed rate mortgage: · Monthly payments remain the same each month allowing for easy budgeting · If interest rates go up, you are protected from rising interest rates · If interest rates go down, you can always refinance to a lower rate Disadvantages to a fixed rate mortgage: · If you choose a shorter loan life, your monthly payments increase · If you choose a longer loan life, your monthly payment decreases but the total interest paid over the life of the loan is much higher · If interest rates fall, your mortgage payment remains unaffected and you will still pay at the higher interest rate A mortgage in which payments are made every two weeks instead of once a month resulting in 13 monthly payments being made in one year rather than 12 is referred to as a Bi-weekly Mortgage. The extra payment reduces the principal, substantially reducing the term. Making your mortgage payments earlier and more frequently through weekly or biweekly payments can cut years off of your term, reducing your interest expense by thousands of dollars. 4. Government Loans - Government housing loans help lower the costs of mortgages so that more people can afford to own their own home. For thousands of first-time and low-to moderate-income buyers, the only way into the home market is through loan programs sponsored by the government. These loans usually feature low down payments, below-market interest rates, few if any points, relaxed income/debt ratio qualifications etc. Check out Ideal Financial’s “First Time Homebuyer Program”. The two most commonly issued government loans include: Federal Housing Administration Mortgage (FHA) - The FHA offers a mortgage-financing program that insures home loans. The FHA does not make the loans itself but does serve as an insurance policy for lenders. An upfront premium of 1.50% of the loan amount is paid at closing and can be financed into the mortgage amount. Because the financial requirements for FHA loans are relaxed by comparison to traditional commercial loans, more people are able to afford to buy homes. FHA allows 100% gift funds for a down payment, which provides another strategy for many low-middle income families to acquire the down payment for their first home. FHA insurance makes lenders more willing to work with someone who might not completely fit their usual loan qualification requirements. In order to qualify for this type of loan, certain requirements on the property must be met and maximum loan amounts will apply. These requirements vary from region to region. Who qualifies for a FHA Loan? · borrowers whose housing expenses do not exceed 29% of their gross income · borrowers whose total debt should not exceed 41% of their gross income · loan amounts are limited to $219,849 in high-cost areas and up to $121,296 in all other areas · borrowers must buy mortgage insurance What are the main features of the FHA loan program? · borrowers can choose from a variety of loans from fixed rate to adjustable-rate · down payments of 5% or less · interest rates up to 1 % less than market · no pre-payment penalty · mortgages are assumable · most closing costs can be included in the loan Veterans Administration Mortgage (VA)- VA loans are designed for qualified U.S. veterans for the purchase of a home with no down payment and lowered closing costs. A veteran needs to apply for a Certificate of Eligibility by completing VA Form 26-1980 accompanied with copies of his/her most recent discharge or separation papers covering active duty since September 16, 1940. Veterans who served on active duty and were discharged under conditions other than dishonorable during WWII (September 16, 1940- July 25th, 1947), Korean conflict (June 27th, 1950 to January 31st, 1955), Vietnam (August 5, 1964- May 7, 1975) Persian Gulf Conflict (August 2nd, 1990) must have 90 days’ of active duty service to be eligible. Veterans with service only during peacetime periods must have 180 days active duty service. Members of the Selected Reserve, including National Guard, who have completed 6 years of service and have been honorably discharged or are still serving, may be eligible.Who qualifies for a VA Loan? · Veterans of the armed services or reservists who obtain a certificate of eligibility What are the main features of the VA loan program? · borrowers can choose from a variety of loans from fixed rate to adjustable rate · no down payments · no prepayment penalties · mortgages are assumable · loan amounts limited to $203,000 (VA guarantee covers $50,750 on loans over $144,000 5. Home Equity Line of Credit- HELOC – A Home Equity Loan may be a useful source of credit to provide you with large amounts of cash at relatively low interest rates. At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or can not make your monthly payments. However, these loans are considered open-ended allowing you to use the money when and if you need it. Payments are usually calculated at 1.5% of the utilized line balance and, in most cases, are interest only. Check out Ideal Financial Services “Home Improvement Loan Programs”. Advantages of HELOC Loans: · borrowers have money available to them when they need it · cash is available at low interest rates · borrowers obtain certain tax advantages unavailable with other kinds of loans Disadvantages of HELOC Loans: · borrowers could put their home in jeopardy if they fail to make monthly payments or fail to qualify for refinancing · borrowers may find themselves borrowing more freely due to the relatively easy access to cash 6. Refinancing - Refinancing can improve your overall financial situation. Even a small rate cut can pay off quickly resulting in lower monthly mortgage payments. Some mortgage companies are willing to waive routine refinancing charges such as application, appraisal or legal fees that can add up. However, in exchange for no up-front costs, you will have to be willing to accept a rate that might be somewhat higher. Many borrowers use a refinance to shorten the term of their mortgage. This will result in building up equity faster and paying far less in total interest over the life of the loan. Another way to make refinancing work for you is to refinance for more than the balance remaining on your old mortgage. If you find a favorable rate, you could borrow a substantial amount of cash for home improvements, college tuition etc. while not increasing your monthly mortgage payment. Check out Ideal Financial Services “Debt Consolidation Program”. 7. Zero and Low Down Payment Options - Loans and gifts allow many first time homebuyers the ability to purchase their first home with little or no money down. This strategy can not be used for all loan programs but there are options and down payment Grant Programs that can assist homebuyers with their down payments and closing costs. Guidelines must be followed and eligibility requirements do exist for these national non-profit organizations dedicated to assisting homeowners. These programs generally participate with FHA Conforming and Non-Conforming loan products. Check out Ideal Financial Services “Interest Only Program”. 8. There are many other loan options that exist to meet specific requirements: Check out Ideal Financial Services “Construction Loan Program”. |
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