HELP!!! Which type of loan is best for me?
Before you are ready to make an offer on a home, you need to
have your financing in order. Your agent will refer you to a lender who is
usually part of her or his team. Your lender will help you get pre-qualified for
your loan and will recommend the right type of loan based on your circumstances.
Furthermore, your lender will make the entire loan process smooth by guiding you
through the paperwork maze.
This information report was written to help you understand the
basic differences between the types of available loans. This should help you
determine the best type of loan for your circumstances. Talk to your real estate
agent! She or he will explain any questions you have, including how the process
works. Most importantly, your agent will refer you to a favorite lender who will
pre-qualify you.
FHA Loans
FHA Loans are insured by the Federal Housing Authority and
require a small down payment, typically in the 2.5 to 5 percent range. FHA loans
are very popular with first time homebuyers who do not have a lot of cash to use
as a down payment. Most FHA buyers are in the $150,000 purchase range.
FHA loans have several advantages and disadvantages. They
require a small down payment and usually allow for higher debt-income ratios
(it’s easier to qualify). Also, FHA loans are assumable (you can assume someone
else’s FHA loan and vice versa). However, you must pay dual insurance on FHA
loans. Since FHA loans are considered higher risk, you have to first pay an
up-front MIP (mortgage insurance premium) one-time fee in the case of loan
default. Also, a second MIP is factored into your monthly payments. Finally,
since FHA loans are considered a higher risk, the interest rates are usually
higher than conventional loans.
A Loans
VA Loans are guaranteed by the Veteran’s Administration. You
must be in the military, or a veteran, to qualify. The largest benefit of VA
loans is you don’t need a down payment, and very little cash to move in. On the
downside, VA loans require a funding fee that is typically “rolled into” the
loan. This means your mortgage can be substantially higher than the value of
your home. If you plan to live in the home for a short period of time, you run
the risk of losing money when you sell. In this scenario your mortgage
obligation could be higher than the market value of your home. Furthermore, VA
lenders typically require very tough inspections, which can bog down the home
buying process.
Conventional Loans
Conventional loans are the most popular type of loans.
Generally, the more you put down, the less of a risk you are to
lenders. If you put down at least 20% of the purchase price of the loan, you
won’t have to pay PMI (private mortgage insurance that lenders require to
protect themselves in case you default). Also, if you put down at least 20%, you
are likely to get a lower interest rate. If you put down less than 20%, you will
be required to pay the PMI, which will be built in to your monthly mortgage
payments.
Conventional borrowers typically pay all of their own closing
costs. Furthermore, the appraisal process focuses entirely on the market value
of the home, not necessarily the condition it is in.
Fixed rate versus
adjustable rate loans
When you choose your loan, you will have the option of getting
a fixed or adjustable interest rate. The advantage of fixed-rate loans is the
ability to lock in a low interest rate (if interest rates are currently low) for
the lifetime of the loan. There’s a lot of security knowing your payments will
be the same year after year!
If interest rates are high, consider an adjustable rate
mortgage (ARM). The interest rates on your loan adjust up and down, depending on
the index the rate is tied to. With an ARM, if interest rates go up, your
mortgage payments will go up (there IS a cap on how much they can go up each
year). Conversely, if interest rates go down, so will your mortgage payments.
The advantage of an ARM is interest rates are currently high, you can make
mortgage payments based on current interest rates in hopes that eventually
interest rates will fall. Once they fall, you can refinance your adjustable rate
mortgage into a fixed mortgage and lock-in lower interest rates for the lifetime
of the loan. On the downside, if interest rates continue to rise after you get
an adjustable rate mortgage, the monthly payments can become onerous.
Term of the loan: 30
year vs. 15 year
Loans typically come in 10, 15, 20 or 30 year terms. By far,
30-year loans are most common. The advantage of a longer-term loan is the much
lower mortgage payments spread out over 360 months. The downside is the higher
amount of interest you will have to pay over the lifetime o the loan. Shorter
term loans are will save you a lot of money interest. However, the monthly
payments are much higher (typically 15 year mortgage payments are 25% higher
than 30 year payments).
