Buyers can easily get overwhelmed by the options they are confronted with when it is time to apply for a loan. Conventional? Government-backed? Fixed rate? Adjustable rate? Even within these categories there can be several options.
Before you can determine which loan is right for you, you need to have an understanding of how each work and the costs and benefits of each. Let’s start with definitions:
Fixed Rate Mortgage: A fixed term (for example, 15 or 30 years) as well as a fixed interest rate. The interest rate and term are fixed at the start of the mortgage. The monthly amount for the payment of principal and interest will not change during the term of the mortgage.
Adjustable Rate Mortgage: These are also called ARMs. This type of loan has the potential to have monthly payments that change since the interest rate can change. There is usually an initial period of time where the interest rate does not adjust. This might be a “1-year” ARM, 3-year, 5-year, or 7-year. How often the interest rate adjusts will also depend on the loan. Since interest rates do change over time, the payment can either be higher or lower depending on the difference in the interest rate. For example, if someone took out a loan now when interest rates are at record-low levels, it is unlikely that interest rates will continue to be this low when the interest rate adjusts. Furthermore, ARMs generally start out with a lower interest rate than a fixed rate loan.
These are the two most popular types of mortgages used today although there are a number of financing types – not to mention the hundreds of various configurations of rates and point options that are offered.
It is important to know your future plans when determining the type of loan which is ideal for you. For example, if you are planning on staying in your home for only seven years, it might save you money to use an adjustable rate mortgage with the expectation that you will be moving and taking out a new loan before the interest rate is adjusted. However, what happens if there is a health issue or something else which prohibits you from moving in seven years? What if you cannot move into a fixed-rate mortgage? These things must be taken into consideration when determining whether you can afford your monthly payment – now and later.
Mortgage Payments Typically Consists of –
- Principal: The repayment of the original amount borrowed on a monthly basis.
- Interest:The cost of borrowing the principal amount, repaid on a monthly basis.
- Taxes:Real Estate taxes paid to a local government agency.
- Insurance:Homeowners insurance on the home. Also any mortgage insurance, which is paid to protect the mortgage company.
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.
How much down payment do I need?
This is one of the questions I am asked most often. Unfortunately, there is no standard answer. Down payments will vary from 0% (with a VA–Veteran’s Administration loan or a USDA loan) to upwards of 25% (with certain “non-conforming” loans). As an average, most home buyers make down payments in the 5%-15% range, although your own personal situation may dictate more or less down payment. When you are factoring money for a down payment, don’t forget about closing costs, which will total in the 3-5% range, payable in cash at the time of closing.
All financing is customizable. It is necessary to fit the buyer’s specific needs and financial ability into the loan program that best suits it. There are 100’s of loan programs out there right now. The most efficient way to find out what programs are available and which is the right choice for you is to schedule a consultation with us or a loan originator.