Navigating the Murky Waters of Mortgage Options
With so many borrowing options available for homebuyers these days the mortgage jungle can be rather confusing to navigate. I’m going to list a few of the major loan programs available and provide a short overview to help provide a little clarity for your home buying path.
Conventional Fixed Rate Mortgage—this is by far the most common mortgage. This is probably the most beneficial available loan to the borrower. While the interest rate isn’t as low in the beginning as an adjustable rate mortgage, you don’t run the risk of having a much higher interest rate when the rate changes.
Adjustable Rate Mortgage—this particular mortgage provides a lower initial interest rate, but that interest rate is adjusted periodically to meet the current rates, this is beneficial if rates decrease, but not so much so if interest rates increase. This particular loan is best for those who either know without a doubt that their income will increase significantly before the next adjustment or who are only planning to be in their home for a short period of time.
Federal Housing Administration Loans—also known as FHA loans, FHA has a program for almost anyone. If you are a first time homebuyer this is a program you should definitely check into. They have a special program for those hands on types who like to fix up homes (you must be planning to occupy the home in order to receive this type of loan), reverse mortgage loans, loans to make your home more energy efficient, and they even loan to those buying manufactured housing. The truly great thing about FHA loans is that they guarantee loans so that you can get a better interest rate. They can also assist you with finding grants and gifts to assist with down payment and/or closing costs.
Department of Veteran’s Affairs Home Loan Guarantee Services—this service provides 100% financing with lower interest rates to qualifying veterans. This is a great way to buy a home if you meet the requirements. You do not have to be a first time homebuyer in order to qualify for this program but you must be a veteran or an unremarried spouse of a veteran who died while in military service or is missing in action or a prisoner of war.
40 year Loan—Fannie Mae has decided to give these a go. While these loans do not decrease the monthly payments significantly it can be the difference in a family meeting the requirements to receive the loan in the first place. While not a highly recommended loan because of the incredible amount of extra interest you will pay over the course of your loan, this loan is worth considering if it you are right on the cusp of the acceptable debt that mortgage companies allow. A $60-100 per month difference can be all the difference in the world if you are in this situation. You can also look into refinancing later on so this loan isn’t a lost cause.
Interest Only Loans—these loans allow the borrower to pay the interest only with no payments toward the principle for a set amount of time (generally 5 or 10 years). These interest only payments are significantly lower than a traditional principle and interest loan payment but keep in mind that this comes with a much higher price later on and you will be establishing little to no equity in your home. I do not recommend this loan unless you are sure you can handle the added payments later on. They do allow you more house for your money but remember that eventually you have to begin making the principle payments.
I hope that I have given you a decent overview of the many loans available today. Keep in mind that if you are working with a realtor, he or she, may be your best source of information on loan and grant programs in your area. It is definitely worth asking about. They are working for you after all; don’t be afraid to let them earn their commission. Good luck in your home search and the search for financing, it is my sincere hope that this has helped make you aware of options you may not have known about. Perhaps you will find the perfect loan for you as well as the home of your dreams.
