There are two basic types of loans. Let’s cover those first:
Fixed Rate Mortgage – This is exactly what it sounds like. The interest rate is fixed for the duration of the loan. Nine times out of ten, this is going to be your best bet. It generally comes with the least amount of risk and the best rates over the long haul.
Adjustable Rate Mortgage (ARM) – Unlike a fixed rate mortgage, an adjustable rate mortgage’s rate changes over time. It generally starts out lower than the average market rate, but it can go much higher than the market rate within a few years. There is a cap on how high an ARM’s interest rate can go. For example, a six-point cap means that if you start with a 3% interest rate, it can’t go above 9%, but 9% is a whole bunch of percent!
Next let’s discuss a few of your options:
Conventional Loans – This is the most basic of all mortgages. Conventional loans are not insured or guaranteed by the federal government. It’s just you borrowing money from a bank and paying it back. The interest rates are usually pretty good, but this option does require a larger down payment than most of the options below.
FHA (Federal Housing Administration) Loans – The rates are generally higher for an FHA loan, but you can get them with a very low down-payment. That translates to: “If you can’t wait until you’ve saved up enough money for a down-payment, and you really want your home right now, regardless of home much it will cost you, get an FHA loan.”
VA (US Department of Veterans Affairs) Loans – These are the loans offered to our Armed Forces. I qualify for a VA loan, but I have never taken one out. Though they will often finance up to 100% (yes, no down-payment), the interest and fees are generally much higher than conventional loans.
Balloon Loans – Balloon loans offer a fixed rate (generally low) for a period of time, with lower monthly payments than most other types of loans, but at the end of the period, the entire balance is due. Generally this type of loan is either for investors, or people looking to refinance before the end of the period.
USDA/RHS Loans – These loans are for people in rural areas, offered by the RHS (Rural Housing Service). This could be a good option for someone who is buying a farm, for example. There are many guidelines and specifics to getting approved for this loan. Having a degree in agriculture can actually help you qualify for this loan. You can see all the specifics on the US Department of Agriculture’s website.
There are other types of loans, such as interest-only ARMs and Jumbo loans, but these types of loans are less common.
Private Mortgage Insurance (PMI) is generally required if you have less than 20% equity in your home. For example, if you buy a $100,000 house (mortgage for 100k and appraises for 100k), and you put 15% down (85k remaining balance – 15% equity), you would be required to pay PMI until you paid the house down to $80,000 (20% equity).
PMI is for conventional loans, whereas VA loans require no PMI, and FHA loans have their own insurance and fees for this purpose. But when you’re taking out a conventional loan from a bank, they don’t have the government or the VA backing anything, so they have to take precautions against you possibly not paying your mortgage.
PMI is generally 0.25% – 2% of your mortgage balance, per year. And once you hit 20% equity, you can contact your lender and have the PMI removed. Though the lender should do this automatically, you’ll want to make sure it happens. They will give you a statement in the beginning stages of the loan that will layout how much, and how long, you have to pay until you hit the 20% equity mark.
If you are considering purchasing a home, we can put you in touch with a preferred lender who can help identify the loan that will be best for your specific situation.