If you are a new home buyer, there is a single daunting question that you must ask yourself: How am I going to pay for it?! Unless you have been left a large inheritance or have recently hit the Powerball jackpot, you will most likely need to get a loan to help you afford the purchase of a new home. This loan will be in the form of a mortgage – to which there are several types. So, let’s explore what type of mortgage is right for you.
To help you get started your real estate agent or mortgage lender can help you determine how much of a loan you may be able to receive, and will take you through the steps of applying for a loan. But before you jump into the process of actually getting a mortgage, it will be beneficial to understand the basics of mortgage lending and the different types of mortgages that may be available to you.
The Different Types of Mortgages (Fixed-rate & adjustable rate mortgages)
One of the first and most essential elements of a mortgage to you as a borrower is the interest rate. The interest rate determines exactly what your monthly payment will be and how much you will end up paying the lender. If you are typically an organized person and like to know exactly how much money you will owe each month; you will most likely prefer a fixed-rate mortgage, where the interest rate stays the same for the duration of the loan. On the other hand, if you are open to some wiggle room in your budget or don’t intend to stay in the home for very long, an adjustable rate mortgage (ARM), might be the better option for you. ARMs have a fixed rate for a specific period of time (three years for a 3/1 ARM, 5 years for a 5/1 ARM, and so on). However, the most important thing to know regarding ARMs, is that they can change every year depending on whether the national interest rate index changes. So, while you may get a better starting interest rate by going with an ARM, this rate can significantly increase over the course of time.
Jumbo or Conforming Loans.
A conforming loan gets its name from the fact that conforms to guidelines dictated by Fannie Mae and Freddie Mac, mortgage-buying entities that are privately owned by supported by the government. One of the main restrictions in a conforming loan is the amount. This varies depending on the location and specific number of units in the property. As an example, Fannie Mae’s loan limits for conventional mortgages currently lists a maximum mortgage of $453,100 for a one-unit property in the contiguous states. A jumbo loan is a mortgage that exceeds the maximum conforming mortgage rate of $453,100 and typically has stricter qualifying standards.
Conventional or Government-guaranteed Mortgages.
If you didn’t win that Powerball or inherit a vast fortune from your great distant relative, you might want to have Uncle Sam on your side. This can be the next best thing when you want to borrow money to buy a home. This is especially true if you have had some credit challenges, don’t have a sizeable down payment, or want to keep your monthly payment as low as possible.
Mortgages Backed by the Government.
FHA Loans: A loan backed by the Federal Housing Administration (FHA) offer lower interest rates and more flexible qualifying requirements. Plus, the down payment could be as low as 3.5 percent, depending on your credit score. This can be an especially attractive option for someone who doesn’t show regular income.
VA Loans: If you are a veteran or member of the military (or the qualifying spouse) you may qualify for a VA loan, which can allow you to get 0% down loan with more attractive terms and an easier approval process.
Rural Housing Loans: Backed by the U.S. Department of Agriculture, Rural Housing loans help buyers with low or moderate incomes buy or build a home in rural areas.
If none of the government loan programs are a good fit for you, there’s always a conventional mortgage, which is the traditional type of mortgage obtained from a lender without any type of government guarantee or backing involved.
If you have more questions regarding what type of mortgage you can qualify for, contact us today!