There are many different mortgage options available but which one is right for you? This guide on mortgage information will help you understand the different types of homes loans available, along with an example of what repayment will look like for each one and the criteria to apply for each mortgage loan.
Fixed Rate Mortgages
Fixed rate mortgages are one of the most popular types of mortgages. Over 75% of all home loans are fixed rate mortgages that are usually in terms of 30, 15 or 10 years. The benefit to choosing a fixed rate mortgage is that you will know what your payment will be every month throughout the term of the lease. This allows you to budget every month around the mortgage payment and plan for the future. You will never have to worry about your interest rate increasing and will be able to refinance when the rate drops while you are in repayment.
Example: If you purchase a $175,000 home with 20% down and a $140,000 loan at a fixed interest rate of 4.5% you will have a monthly mortgage payment of $688 for 30 years.
Qualifying: A fixed rate mortgage is one of the easiest loans to qualify for. When being considered for a fixed rate mortgage your income to debt ratio, employment history, credit score, personal assets, total income and down payment percentage will all be taken into account. There are no location restrictions for this type of loan. Your agent will assist you in the mortgage process and can help explain more about fixed rate mortgages.
ARM’s (Adjustable Rate Mortgage)
Adjustable rate mortgages are recommended for homebuyers that intended on only living in their new home for less than five years. This loan allows you to enjoy a home at a low interest rate and subsequently lower payments for the first five years of the loan. Another reason that a buyer might want to get an ARM is because it is easier to get approved for when you have poor credit. Adjustable rage mortgages are given different interest rates throughout the terms of the loan. They are comprised of two numbers, the initial rate and payment and the adjustment period. The initial rate/ payment is the first number and it can range from one month to five years. The adjustment period is the second number and it is usually one of the following periods: every month, quarter, year, 3 years or 5 years. A 5/1 ARM is a common type of adjustable rate mortgage. During the first five years of the loan you pay one interest rate and then every year after that the interest rate on the loan is adjusted to a new rate based on the index that controls the loan usually the 1 yr Libor or the 1 yr Treasury. The annual adjustment is typically capped at a 2% increase per year and the total cap for an interest rate the loan can hit in the five year period is 12%.
There are several different ARM terms that you can choose from that all work in a similar fashion: 5/1 ARM, 5/5 ARM, 3/1 ARM, 3/3 ARM, 5/25 ARM, and 10/1 ARM. You can ask your REALTOR® or mortgage broker for more information regarding different types of ARMs.
FHA (Federal Housing Authority) Loan
An FHA loan is a great choice for many first-time home buyers. Because the loan is issued by an approved lender and then insured by the government, it makes buying a home possible or easier because the borrowing requirements are less strict. An FHA loan offers the buyer a low minimum down payment, reasonable credit expectations and flexible income requirements. FHA loan providers give the buyer a better chance for getting approved for the loan because they are more apt to look at the entire situation of the buyer and not reject them for falling short of one requirement. Though the criteria to get approved for an FHA are wider then more conventional loans there are still eligibility requirements that must be met or mostly met. A few of these requirements include: the home must be your primary residence and owner-occupied, the mortgage is not to exceed a certain amount (typically around $400,000 in most areas), good payment records (no minimum credit score requirements but rather the activities that led to the score will be taken into account), stable income and full-time employment is required, debt-to-income ratios exceeding 45% back-end ratio may be flagged and minimum down payment of around 3.5% of the purchase price. To see a full list of requirements contact your agent or lender.
VA (Veteran’s Affairs) Loan
In order to apply for a VA loan the buyer must meet one of the following criteria: you served 181 days on active duty during peacetime, you served 90 days on active duty during wartime, you served six years in the Reserves or National Guard or your spouse died in the line of duty or from a service-connected disability. After you identify with one of the previously listed requirements you must meet the rest of the VA and lender requirements which includes everything from credit score and credit history to debt-to-income ratio to the property’s condition to the market value of the home and more. The VA much like the FHA doesn’t issue loans, they insure them. This means that the requirements to secure a loan are much less strict than with a traditional loan. The confidence in knowing the loan is insured gives lenders the ability to offer veterans no-down-payment financing and competitive interest rates. The basic requirements to be approved to a VA loan are as follows: meet one of the service requirements listed above, have a credit score of 620 or better, have a debt-to-income ratio of 41% or less and be looking to borrow no more than $417,000 in most parts of the country unless they are willing to put down a down payment or larger down payment to secure a loan for the difference. For more information about VA loans contact your REALTOR®.
A balloon mortgage looks a lot like a 30-year fixed-rate mortgage (FRM) because the payments are calculated in the same way. Many times the interest rate is less for balloon mortgages than for an FRM which makes the monthly payment lower. The difference between a balloon mortgage and a 30-year fixed mortgage is that after a specific time period, typically 5 or 7 years, the entire balance of the loan is due. For example, if you take out a $100,000 loan at an interest rate of 5% for a 5-year balloon mortgage and your monthly payment is $536.82. At the end of 5 years the balance of $92,365.63 will come due. Upon reaching the balloon payment you will have the option to either repay the balance, sell your home or refinance your home. Balloon mortgages, much like ARMs can be beneficial if you plan on moving to a different home by the time your balloon payment comes due. Another benefit to a balloon mortgage is that typically you can secure a lower interest rate than you would for a typical 30-year FRM so your first few years of repayment are less expensive so you can save more money while living in the house which will give you more money when you go to buy your next house before your balance comes due. Your agent can direct you to more information regarding balloon mortgages.
An interest-only mortgage allows the borrower to only pay the interest on the loan for a specified period of time, generally 5 to 10 years. The borrower does have the right to pay more than just the interest during that period of time if they want to, this is the only way that the principal of the loan will actually change during this time period. If the borrower does not pay any of the interest of the loan during the specified time period then the balance of the loan remains the same. For example, if you take out a $100,000 30-year loan at an interest rate of 4.75% your payment each month will be $395.83 and you will pay just under $5,000 in interest a year. The advantages to an interest-only loan is that your payments will be very affordable during the interest-only period and you will have increased purchasing power for your first or second home because the value of your home might increase over the interest-only period so you may be able to get for your home that you would have paid for it with a traditional loan. One other advantage to an interest-only mortgage is that your payments are much more flexible, you can pay off part of the principle without being penalized for it. There are a couple disadvantages to getting an interest-only mortgage, the biggest one is the potential shock of the mortgage payment once the interest-only period stops and you are left to make full amortized pavements to cover the interest and the principal of the loan. Another big disadvantage of an interest-only loan is that if you don’t pay anything towards the principal during that time you will not have an equity in your home and you will not be able to take out a home equity loan because you haven’t been paying down the principal of your mortgage. To find out more about interest-only mortgages contact your agent.
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