 Choosing the best mortgage Selecting a mortgage can be difficult for first time home buyers. Mortgage lenders offer a variety of loan packages under different names with different interest rates, up-front costs, and terms. You need an experienced local mortgage broker to get a mortgage that best fits your needs at a competitive price.
Mortgages come from many sources including commercial banks, credit unions, savings and loans, life insurance companies, and family members. When you start to shop for a mortgage, you will find a number of factors may cause interest rates to vary, such as differences in lenders, the size of the mortgage, the amount of down payment, and general economic conditions. Additionally there are a number of mortgage types in today’s market including: fixed rate, adjustable rate, graduated payment, growing equity, balloon, or wraparound and others. In addition, you have other decisions to make like Fixed versus adjustable payments. Fixed interest rate loans have with payments that usually do not vary versus adjustable and variable-interest rates where payments do vary. Additional considerations are things like the age of your family and how long you plan to stay in the house. It may take time, phone calls, and leg work but well worth the effort when you need to sell your home. FIXED RATE MORTGAGES The traditional, fixed rate mortgage (FRM) is considered the best of all mortgages. Its advantage is that neither the interest rate nor the monthly payment (principal and interest) ever changes over the life of the loan. If you borrow ed at 5 percent and rates go up to 10 percent, your rate stays the same. You know at the outset exactly how much the loan will cost each month until it is paid off. The down side is the risk you take if you lock into a fixed rate mortgage and the reverse happens, if rates decrease below 5%. In my opinion, interest rates are headed up so it is best to lock in now. Short-term fixed rate mortgages of 10, 15, and 20 years have become popular because equity is built up faster. They are often just like the 30-year loans but offer a lower interest rate because there is less long-term risk. Your benefit is a huge reduction in total interest charges. However with these type of loans you have higher monthly payments and may not qualify. There are three government-backed loan programs that offer fixed rate mortgages. 1.) Federal Housing Administration Insured Loans (FHA). FHA guarantees the lender that it will pay if the borrower defaults on the loan. The interest rate is usually lower than conventional mortgages. Mortgage insurance is charged and is a bit higher this year due to the housing collapse. FHA accepts higher credit risks than conventional lenders making it easier for buyer’s to qualify. FHA loans require 3.5% down payment which is lower than a conventional loan and allow seller contributions of a 6% maximum. 2.) Veterans Administration Loans (VA) where the Veterans Administration guarantees the loan. Only veterans or their survivors are eligible. No down payment is required so borrower’s can potentially get 100% financing. They have lower interest rates and repayment period is up to 30 years. There is no prepayment penalty to the borrower and no cost for mortgage insurance. 3.) Farmers Home Administration Loans (FmHA) is administered by USDA for rural families. The interest rate is relatively low, payment period is up to 40 years, no down payment, the amount of loan based on applicant’s eligibility, mortgage is insured, and borrower must meet income guidelines. With this type of loan, not only must the borrower qualified but the home must meet certain requirements. If your family’s income is not high enough to qualify for a fixed rate, you might seek an ARM. ADJUSTABLE RATE MORTGAGES If you plan to move or refinance in 3 to 4 years, you may want to forego a fixed rate mortgage and choose an adjustable rate mortgage (ARM). Flexible or variable rate loans are two other names for this type mortgage is known as. With an ARM mortgage the interest rate will change periodically during the life of the loan, depending on interest rates in financial markets. With an ARM, you pay a lower interest rate at the beginning of the loan term. This means you can qualify with a substantially lower income than for a comparable fixed rate loan and your initial monthly payments are lower. The interest rate, however, can go up over the life of the loan, and you must consider whether your future income will be enough to meet the greatest possible increase in payments. If ARM interest rates increase enough, the monthly payment may be more than that paid for a fixed rate mortgage. However, if interest rates decline, so do monthly payments. To avoid constant and drastic fluctuations, most ARMs have caps or limits on how much the interest rate or payments can change, both per adjustment period and over the life of the loan. Adjustments are made periodically as specified in the loan contract. The most common adjustment periods are every 6 months, 1, 3, and 5 years. For example, if you have an ARM with a one year adjustment period, the interest rate can change only once a year on a specified date. Some lenders may allow you to convert your ARM into a fixed rate mortgage under certain terms and conditions. You need to learn how much advance notice you will get before the new payment or rate goes into effect. The lender should be willing to tell you how the rate is determined. Some questions to ask your lender are, does the rate change monthly? Are there limits on the number of times and what amount the rate can fluctuate? ARMs may be your only choice initially if you do not have income to qualify for a fixed rate mortgage. Look for ARMs which can be converted to a fixed rate interest at a later date. Remember, ARMs can be very complicated. It is crucial that you have a clear understanding before obtaining an adjustable rate mortgages. |
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