When purchasing a home, choosing the right type of mortgage loan is one of the most important decisions you’ll make. There are many options available to choose from. Don’t worry, we don’t expect you to know them and we are happy to help you understand the basics of what is available.
If you are serious about purchasing, the best thing to do is to reach out to a Mortgages Unlimited Mortgage Consultant. After taking inventory of your debts, credit score, income and other monthly bills, your Mortgage Consultant can help you make an informed decision about the terms of your mortgage.
What loan options are available?
There are two main types of mortgages: a conventional loan guaranteed by a private lender or banking institution, or a government-backed loan.
FHA loans are insured by the Federal Housing Administration and established to make home buying more affordable, especially for first-time buyers. FHA loans will allow down payments as low as 3.5% of the purchase price and can qualify with credit scores of 580 and lower.
FHA loans have two types of mortgage insurance premiums:
An upfront premium of 1.75% of the loan amount due at the time of closing and an annual premium that varies from a low of 0.45% to a high of 0.85% depending on your down payment and term. This premium is rolled into the monthly mortgage payment for the life of the loan.
VA loans are insured by the Department of Veterans Affairs and offer buyers low to no down payment options and competitive mortgage rates. Go to (insert) to find out who is eligible for a VA loan.
USDA loans are backed by the U.S. Department of Agriculture and are geared toward rural property buyers who meet income requirements. This is also a no down payment loan.
A conventional loan is a loan backed by either Fannie Mae or Freddie Mac. More than half of all new mortgage loans are conventional loans, which include special mortgage programs such as the HomeReady™ mortgage and the Conventional 97 (3% down payment with ultra-low mortgage insurance rates, and a 100% gift from blood or by-marriage relatives.
Putting less than 20% down on a conventional loan, will require borrowers to pay private mortgage insurance (PMI). The good news is that once you reach 80% LTV (loan-to-value), you can drop the insurance. On an FHA, you have to pay for mortgage insurance for the life of the loan on top of the upfront premium.
Fixed or Adjustable rate:
Once you’ve chosen your loan, you’ll need to decide if you want a fixed rate or an adjustable rate mortgage. A fixed rate stays the same for the life of the loan. If you are settled down with a family, job and are ready to set down roots, a fixed rate mortgage will make sense for you.
An adjustable-rate mortgage (ARM), is a home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down.
Typically ARMs have a lower initial interest rate than on a fixed-rate mortgage and may provide flexibility if you expect future income growth or if you plan to move or refinance within a few years.
There are pros and cons to choosing an adjustable rate mortgage. It is best to contact one of our Mortgage Consultants to fully understand if an ARM is the right loan product for you.