Real Estate
Report:
HELP!!! Which type of
loan
is best for me?
By Lynn Byrne
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.
VA
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 you can make mortgage payments based on higher 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 will save you
a lot of money in interest. However, the monthly payments are much higher
(typically 15 year mortgage payments are 25% higher than 30 year payments).
I hope
this informational report was informative. As your local real estate
professional, I am available to answer any questions you have about the best
type of loan for your circumstances. You can call me at any time for advice,
and please remember that you are under no obligation or pressure of any kind. I
would very much like to help you.
Best
Regards,
Lynn Byrne
CenterPointe Realty
www.lynnbyrne.com
386-566-7503
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