You are wondering which kind of mortgage is best. The answer: There is no one correct answer. Deciding which type of mortgage will best fulfill your needs can be difficult. There are so many types of loans and different term lengths. Your choice is extremely important and can take some time and effort to research. While often neglected by homebuyers, a little research before choosing your mortgage can save you thousands of dollars in the long run.
There are several elements of a loan that should be analyzed. While one of these elements may suggest one type of loan, another may call for a different type. You must weigh each ingredient separately and collectively. You will find that your answers to the questions below will ultimately determine the type of mortgage that best fits your needs.
How long do you plan to stay in this home?
Five years? Ten years? Thirty years? The length of time you will be in the home will certainly play a part in determining which loan to apply for. If you only plan to be in the home for 5–7 years or less, you should seriously consider an adjustable rate loan. If you intend on staying 20–30 years, a fixed rate mortgage may be right for you.
How much risk are you willing to accept?
If you are the type of buyer that needs to know exactly what you will be paying each month for the term of the mortgage, a fixed rate mortgage will fulfill this need. The fixed rate loan, however, will also net a higher interest rate. If you are willing to take some risk of fluctuations in the interest rate, you may be able to receive a lower interest rate.
What are your income expectations?
Plan for the future. Do you anticipate a gradual or dramatic increase in your income in the next few years? If you expect a big increase, a graduated payment mortgage may be best for you.
How much cash do you have available for upfront costs?
If you have the resources, you may want to make a larger down payment to lower your monthly payment. By keeping a higher monthly payment however, you might be able to shorten the term of the loan to a 15-year loan in order to pay it off quicker.
Keep in mind that you’ll have closing costs and fees to pay in addition to your down payment. If you don’t have much cash saved for your upfront costs, don’t despair. You may be need to accept a higher monthly payment or even lower your monthly obligation by choosing an adjustable rate mortgage.
In addition to choosing a type of loan, you must also consider which lender to use. Once again, several factors will influence your decision.
Annual Percentage Rate (APR)
This is most likely the best way to make an "apples-to-apples" comparison of lenders. The APR reflects the cost of credit on a yearly rate and includes any points and fees in addition to the interest rate.
Interest Rate
Find out the rate the lender will commit and how long the lender will guarantee it. Get any commitments in writing. As with any transaction, if it isn’t in writing it doesn’t exist.
Points and fees
These factors will vary greatly. Look out for hidden fees. Make sure the lenders disclose all fees; ask what they charge and what is included and what is not.
Loan Approval
Both approval and funding time should be considered. You don’t want to lose a prospective home because your lender takes weeks to fund your loan. A lender should be able to fund the loan within ten days.
Lender Reputation
Don’t rely on solely someone else’s recommendation. You, not your friend, must feel comfortable with your lender. If you do feel good about your lender and trust him, it will be much easier to trust his advice on what kind of mortgage will best suit your needs.
Other Financing Options
If you can't qualify for a conventional loan because of income, don't give up. There are a number of special programs to get you into a home. Some cities have BMR (below market rate) housing programs that allow qualified buyers to purchase new homes substantially below market value.
Programs to Help Lower Income Families:
VA (Veteran)
Community Homebuyer loan program
FHA's 203(k) program (for fixer-upper)
Mortgage Credit Certificate program (MCC)
Enhance Fannie Neighbors mortgage program
Fannie Home Style loan program (for fixer-upper)
Fixed-Rate Mortgage Loans
If you plan to stay in your house for a long time, your mortgage rate is probably a big concern. Because your interest rate stays the same throughout the entire life of your loan, a fixed-rate loan ensures that there are no surprises. Fixed-rate mortgages are available in a variety of repayment terms, with 15, 20, and 30 years the most common.
• 30-Year Fixed-Rate Mortgage Loans
With the 30-year fixed-rate you will be able to keep your payments down by making them over an extended time period of 30 years. This loan is the easiest fixed-rate to qualify for and provides the maximum interest deduction for taxes. If you are planning to stay in your home for a long time & would like to have the extra money for other purposes this type of loan is your best bet.
• 20-Year Fixed-Rate Mortgage Loans
The benefit to the 20-year fixed-rate over the 30-year is that not only do you become debt free 10 years sooner but the interest rate is often much lower. This mortgage amortizes principal and interest over 20 years & may save a considerable amount of total interest in the long run but the monthly payments will overall be much higher than the 30-year fixed-rate.
• 15-Year Fixed-Rate Mortgage Loans
The 15-year fixed rate has the lowest interest out of the fixed-rates and will save you a significant amount of interest. Since you would be paying off the mortgage quicker than the other fixed-rate loans, you will build up equity in your home a lot sooner. This is an ideal loan for someone who is approaching other big expenses such as college tuition for their kids or their own retirement.
Adjustable-Rate Mortgage Loans
With an adjustable-rate loan (ARM), the interest rate adjusts periodically as the market rates change. This means that your monthly interest rate could go up or down depending on the market. These loans are attractive to consumers because they usually offer a lower initial interest rate than a fixed-rate loan. The other benefit to this is that many people qualify for larger loans due to this initially lower rate. The downside is that the rate can increase by quit a bit and some people can't handle the instability.
Who should consider an ARM?
• If you are confident that your income will rise enough in the upcoming years to support an increase in interest rate.
• If you plan to move in the next few years and therefore aren't concerned with an increase.
• If you need a lower initial rate to afford to buy the home you want.
Please note: There are "caps" or limits to the amount that your interest rate can increase. Each loan has two caps. One sets the most your interest rate can increase during each adjustment period and the other cap sets the absolute maximum amount of all interest rate adjustments throughout the life of the loan. These caps depend on the terms of your loan. Make sure that you can afford the payment when rates are at the highest cap mark before accepting the loan.
Government Loans
The following are three agencies that offer government-insured loans. The properties being purchased must meet certain standards to apply.
• Federal Housing Administration (FHA) Loans
An FHA loan allows you to put down a very low down payment on your home. (from 3-5% depending on the FHA appraisal value.) The maximum loan limit is based on the average cost of living in your area.
• U.S. Department of Veterans Affairs (VA) Loans
The VA loan allows qualified military veterans to buy a house under $203,00 with no down payment.
• Rural Housing Services (RHS)
The RHS offers low interest rate loans with no down payment to people with low to moderate income households who live in rural areas or small towns.
• State and Local Loan Programs
Many states and local housing agencies offer special programs for first-time home buyers. These programs typically offer mortgages with low down payments or lowered interest rates with specified income guidelines for first-time home buyers. Some of these agencies offer assistance with down payments and closing cost. Check with your local state housing authority for more information.
Balloon Loans
Balloon loans are attractive because they offer a lower interest rate for a short term financing period. (usually 5, 7 or 10 years) At the end of the term you will be required to either pay off the outstanding balance in one lump sum or you can refinance the loan. If you choose to get a balloon loan make sure that you know all the conditions that apply for refinancing. Most people who chose to get a balloon loan plan to sell or refinance their home within a few years and want a fixed, low payment. If you don't think you can meet the refinancing conditions or you think the balloon term may be up before you are ready to move, this is probably not the type of loan for you.
Affordable Housing Loans
These loans are for households of low to modest means. For qualifying families, Fannie Mae, in cooperation with housing providers, can help with high down payments, closing costs & housing expenses by offering flexible underwriting ratios that allow you to use more of your monthly income toward housing costs. These loans require a smaller down payment and a lower closing cost than normal mortgage loans. Generally, you are eligible if your household income is no more than 100% of your area median income.
• Fannie Mae's Community Home Buyer's Program ®
This program offers financing to low and moderate income home buyers with good credit but who may not qualify for home financing based on traditional lending criteria.
• 3/2 Option ®
This option makes it easier to accumulate funds for your down payment by offering a 3% down payment instead of 5% that is usually required. The remaining 2% can be supplied by a relative and/or nonprofit organization, state, federal or local government program.
• Fannie 97 ®
This type of loan is ideal for someone who has enough money for their monthly mortgage payments but doesn't have immediate access to cash for the down payment. It offers a 3% down payment and is available with either a 25-year or 30-year term. Closing costs can be supplied by a relative and/or nonprofit organization, state, federal or local government program.
• FannieNeighbors ®
FannieNeighbors removes the income limit if you are purchasing a home within a designated central city or eligible census tract.
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