July 1st, 2016 5:07 AM by Jackie A. Graves, President
Buying a home is probably the
largest purchase you’ll make in your lifetime. And choosing the right type of
mortgage loan is one of the most important decisions you’ll make in the
homebuying process. With so many different options out there, it can be hard to
find an affordable home loan that meets your financial goals.
by asking yourself “How
much house can I afford?” After taking inventory of your debts,
credit score, income and other monthly bills, you can make an
informed decision about the terms of your mortgage.
are three key loan decisions you’ll need to make.
are two main types of mortgages: a conventional
loan guaranteed by a private lender or banking institution, or a
government-backed mortgages come in one of three forms:
three programs follow the limits for conforming loans and have low down
payment requirements. More on that later.
loans, on the other hand, are offered and backed by private entities such as
banks, credit unions, private lenders or savings institutions. Borrowers need
good credit to qualify. This is because the loans aren’t guaranteed by an
outside source — so the possibility of borrower default poses a
greater risk for lenders.
loans have terms of 10, 15, 20 or 30 years. They also require much
larger down payments than government-backed loans. Borrowers are expected
to put down at least 5%, but that amount can vary based on the lender and the
borrower’s credit history.
don’t have a lot of cash saved up for a down payment but have solid credit and
a stable income, a government-backed loan is likely the way to go. Keep in mind
that if you choose a conventional or government-backed loan and you’re
making less than a 20% down payment, you’ll have to pay for private
can afford to save up a large down payment and build your credit score while
lowering your debt-to-income ratio, a conventional loan is a great choice
that can eliminate some of the extra fees and higher interest rates that may
come with a government-backed loan.
you’ve chosen your loan, you’ll decide whether you want a fixed or
an adjustable rate.
Your choice determines the interest you’ll be charged.
interest rate on a fixed-rate loan never changes. If you’re settled in your
career, have a growing family and are ready to set down some roots, a 15- or
30-year fixed-rate loan might be your best bet, because you’ll always know what
your monthly mortgage payment will be. It’s worth noting, though, that if other
fees are rolled into your monthly mortgage payment, such as annual property
taxes or homeowner’s association dues, there may be some fluctuation over
mortgages, or ARMs, have interest rates that reset at specific intervals. They
typically begin with lower interest rates than fixed-rate loans, sometimes
called teaser rates. After the initial term ends, the interest rate — and your
monthly payment — increases or decreases annually based on an index,
plus a margin. They most often appeal to younger, more mobile buyers who
plan to stay in their homes for just a few years or refinance when the teaser
rate is about to end. Paying a lower interest rate in those initial years could
save hundreds of dollars each month that could fund other investments.
amount of money you borrow tells your lender a lot about your level of
risk — and it has a big impact on your interest rate. For this reason, home
loans fall into two main size categories: conforming
loans meet the loan limit guidelines set by government-sponsored mortgage
associations Fannie Mae and Freddie Mac. In 2016, conforming home loans
for single-family homes in most of the continental U.S. are limited to $417,000.
In designated high-cost areas, such as Hawaii and Alaska, the conforming loan
limit for single-family homes goes up to $625,500.
can be non-conforming for a few different reasons. Some, called jumbo
loans, are for borrowers whose loan amounts are higher than the conforming loan
limits in their areas. Jumbo loans are considered riskier and come with higher
interest rates to protect lenders. You’ll need to make a larger down payment
(at least 20%) and have pristine credit to qualify for one. Other types of
non-conforming loans include those made to borrowers with poor credit, high
debt or recent bankruptcies.
want to stay within conforming loan limits so you get a lower interest rate,
you’ll need to tailor your home search to properties priced below the loan
limit for your area. If you want a house that’s priced above your local limit,
you can still qualify for a conforming loan if you have a big enough down
payment to bring the loan amount down below the limit.
these options might seem overwhelming at first glance. But bear in mind that
the type of loan you wind up getting will depend largely on your credit
profile, income and overall financial goals. Before you start shopping for a home
loan, take complete stock of your finances and try to boost
your credit score as
much as possible.
need guidance, contact a lender or mortgage broker in your area to help you
crunch the numbers and explore your options.
By Deborah Kearns - To view the
original article click here