Which mortgage program is best for you?
There are many types of mortgages. You’ll want to know about each type of mortgage before you start looking for your next home. Most people apply for a fixed rate mortgage. In a fixed-rate mortgage, your interest rate stays the same for the term of the loan, which can range from 10 to 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be and can plan for it, even though your property taxes and homeowner’s insurance may change during the term of your mortgage payment. Another type of mortgage is an adjustable rate mortgage (ARM). With this type of mortgage, the interest rate and monthly payments are typically lower than a fixed-rate mortgage. But your rate and payment may change up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the US Treasury Stock Index.
The advantage of an ARM is that you can afford a more expensive home because your initial interest rate will be lower. There are several government mortgage programs, including Veterans Administration programs, Department of Agriculture programs, Federal Housing Administration mortgages, and conventional loans. Thoroughly discuss your financial situation with your real estate broker about the various loan options before you begin shopping for a mortgage.
Below is a brief description of the 4 main types of mortgages. The Federal Housing Administration (FHA), Veterans Administration (VA), United States Department of Agriculture (USDA), and Fannie Mae/Freddie Mac (conventional financing) have different guidelines and down payment requirements. Fannie Mae and Freddie Mac are the latest sub-government agencies to launch minimum down payment programs. There are also several down payment assistance programs available for first-time homebuyers, recent graduates, and low-income families. Most down payment assistance programs have income and sales price limitations and repayment requirements.
• Conventional Financing: Conventional mortgage loans require a minimum 3% down payment. Private Mortgage Insurance (PMI) is required unless there is a 20% down payment or the mortgage company offers lender-paid PMI. Mortgages are offered for owner occupants and investors.
• FHA Financing: This type of financing requires a minimum of 3.50% down payment. The FHA allows approved nonprofit organizations and/or family members to help homebuyers with the down payment requirement. Upfront and monthly mortgage insurance required. Only owner occupied financing offered.
• Veterans Administration: Honorably discharged veterans or active duty personnel of the US armed forces who meet specified requirements are eligible for mortgage financing with no down payment. VA Mortgages require an initial financing fee unless the veteran is disabled. VA mortgages do not require monthly mortgage insurance, but are available only to owner occupants.
• USDA Financing: This mortgage program is available through the US Department of Agriculture. This type of loan allows financing with no down payment for owner-occupied properties in designated rural areas. Income and sales price limitations apply. Upfront and monthly fee required. There are two different types of loans, including secured and direct loans.
Each of these loan types offers different features and should be thoroughly researched to determine which type of loan is right for your credit and financial situation. It’s always in your best interest to get pre-approval before looking for a new home.
