Types of Mortgages
So, you are thinking about buying a home. Before you even begin looking at real estate options, you need to do your research about the different types of mortgages that are available through Tucker Mortgage and other financial experts. Scores of mortgage products are available in the modern marketplace -- but how do you sort through them all? Our quick and easy guide can help you learn about the various types of mortgages that are currently offered to homebuyers, helping you make the right decision for your current and future financial plans.
Conventional, Insured Conventional and FHA Mortgages
Before we begin discussing the various types of payment structures that are available for homeowners, it is important to determine whether you want a "conventional" mortgage. This simply means that you are choosing a mortgage loan that is not insured by the federal government. Conventional loans include a variety of different loan plans, including fixed-rate and adjustable-rate, along with hybrid ARMs, which we will discuss throughout this document. Conventional loans generally require a 5 percent down payment. They are particularly beneficial for borrowers who have 20 percent or more for their property down payment; if you put down a large amount, you may not even need to purchase loan insurance! As you might expect, a strong credit history is generally a requirement for a conventional mortgage, especially if a borrower is looking for an uninsured loan.
Conventional mortgages are administered entirely through financial institutions such as banks. These conventional loans may be insured by private entities to lower the risk of financial losses by the bank or lending institution. However, not all conventional loans are insured. Borrowers who are seeking loans greater than 80 percent of the property value will generally require private mortgage insurance (PMI), but a large down payment could exempt the borrower from that rule. Smaller loans may not need to be structured as insured conventional loans, which means that the borrower can forego the insurance policy designed to protect the lender. This is particularly convenient for borrowers who are looking to finance their second home or perhaps purchase an investment property. A conversation with your lender can help determine whether you need loan insurance.
In contrast to conventional mortgages, Federal Housing Administration, or FHA loans, are insured by the federal government, though they are still administered by banks. FHA and conventional loans differ greatly in their terms. For example, FHA loans generally require a smaller down payment -- often as low as 3.5 percent -- which allows home ownership to be more accessible to buyers with lower incomes. FHA loans are designed to help people who might not otherwise think of themselves as homeowners! However, these FHA loans often come with higher interest rates, which can end up costing more over the term of the loan. Conventional loans generally require a larger down payment, but they are also less likely to have the high interest rates that raise the cost of a long-term mortgage.
Interest rates for FHA mortgage loans can change periodically, depending on updates to the standards that are set by the Federal National Mortgage Association, also known as Fannie Mae. These standards include the "conforming limit," which is the maximum value of a loan that Fannie Mae and its brother agency, Freddie Mac, will purchase. In comparison, conventional loans with a fixed rate never change because they are not affected by those market variations, making them more predictable and stable. However, these conventional loans may not be as easily available to those who are limited by lower income.
Most home loans that are written in the U.S. come from either a conventional or FHA mortgage sources. Start by determining which of these categories is right for you before you start looking at payment structures and loan specifics. The experts at Tucker Mortgage can help you examine your financial situation to determine whether a conventional or FHA loan will be right for your needs!
Fixed-rate mortgages are often characterized as one of the most predictable types of mortgages. They are fairly straightforward. Your fixed-rate mortgage will always have the same interest rate, no matter what the financial landscape looks like in your region, or in the nation overall. The advantage, of course, is that it is much easier to plan your financial future with a loan that offers stability and predictability. You know exactly how much you will need to spend every month for your mortgage payment, so the guesswork is gone!
Longer loan terms may lead you to pay more overall, and your interest rate may be higher, but the tradeoff is that you will have lower monthly payments. Shorter mortgage terms from Tucker Mortgage allow you to pay off your home faster and build that all-important home equity, but your monthly payments will be higher.
So, why should you choose a fixed rate mortgage? You would probably be a good candidate if you intend to stay in your home for many years; you may even intend to pay it off entirely without selling. People who prefer the stability of a predictable payment pattern are also well-suited to this type of loan. Buyers also need to evaluate the economic climate; if they think this is a "good" interest rate compared to the norm, they should probably consider a fixed-rate mortgage with Tucker Mortgage. You could be enjoying smaller payments while people with other loans are struggling to understand and accommodate their variable rates!
The most common term for a fixed-rate mortgage is the 30-year option, though this type of mortgage can take as little as 15 years to pay off -- and sometimes they can even be extended to 40 years! It is important to keep in mind the fact that the total amount of interest you pay is more dependent upon the length of the mortgage rather than the interest rate itself -- an extra 10 years of payments can add up to tens of thousands of dollars!
Fixed-rate mortgages are ultimately best for those people who intend to stay in their home for a long time and who believe that interest rates will remain stable for the near future. No matter your credit history, a fixed-rate mortgage should be on your list of considerations when you begin to research your own home purchase.
Jumbo and Super Jumbo Mortgages
Borrowers who are looking for a larger loan than the federal recognized "conforming loan limits" may have to seek out special mortgages to accommodate their needs. In most counties, any mortgage loan above $417,000 will require special terms, also known as a jumbo loan. In higher-cost areas, that federal limit may be raised into the $600,000 range. In other words, if you are looking to purchase a home that costs more than a half-million dollars, you will generally need a jumbo loan.
Experts in the industry say that borrowers who are looking for these high-end mortgages generally want to purchase a home in the range of $750,000 to $10 million, with most of those loans valued at $2.5 million and above. Jumbo loans usually cover amounts up to $1 million that exceed the federal standards. Super jumbo loans, on the other hand, typically exceed $1 million. Jumbo loans were not so difficult to obtain before the housing crash in 2008, but barriers were erected in the midst of the Great Recession. Now, though, lenders are loosening their pocketbooks, and jumbo loans have once again become far more affordable.
Jumbo mortgages differ from traditional payment structures because they generally require a large down payment and a credit score of at least 700. High-end jumbo loans may require an accounting of indiidual assets and income in order to prove that you can afford the monthly payments. Jumbo loan borrowers usually need to have about six months' worth of payments in their bank accounts after they close on the house; that sharply contrasts with conventional borrowers, who only need about two months' worth of mortgage payments set aside.
Jumbo loans may not be appropriate for everyone, but they do have some outrageous benefits. Rates for such loans are at an all-time low. Further, interest on the loans valued at up to $1 million is tax-deductible, which can provide a big boon for big-time borrowers. Financial experts at Tucker Mortgage may be able to help you determine whether you qualify for these high-end loans.
Adjustable-Rate Mortgages (ARMs)
Now that we have covered the more traditional types of loans, let's depart into the more complex world of adjustable-rate mortgages, which can cause some confusion among borrowers. ARMs are available through conventional and FHA sources, so borrowers of all income levels may consider this payment structure. Unlike fixed-rate mortgages, these loans involve interest rate adjustments over time. ARMs are considered riskier loans because the interest rate is likely to increase as the term of the loan progresses.
Most ARMs are built on a 30-year mortgage plan. Borrowers choose their initial term, during which an introductory rate is applied. For example, in a 10/1 ARM, your introductory rate would last for 10 years. You would then pay the adjusting rate for 20 years. All of the ARMs are based off of a 30-year terms. For a 7/1 ARM, you would pay the introductory rate for seven years, and then you would have a rate that continually adjusts for 23 years. Similarly, introductory rates last for five years with a 5/1 mortgage and three years for a 3/1 ARM.
Adjustable-rate mortgages can be difficult to understand because they are relatively complex. Your loan acts like a fixed-rate mortgage during the introductory term. Then, after the introductory period, your loan becomes tied to an interest rate index. That means that your loan rate can fluctuate by several points every year; it is periodically re-evaluated after the introductory period ends. The interest rate indexes can come from several sources. Ultimately, this value is tied to a variety of economic factors that can cause fluctuations in the industry standard interest rates.
Your interest rate may fluctuate, but there will be a designated annual cap to prevent an overwhelming hike in your interest rates in a short period of time. Still, the first adjustment after your lower-rate introductory period may be a shock, because these limits do not always apply to that initial change. That is, your payments could skyrocket after the initial introductory period -- and you could be left in the lurch if you have not planned ahead.
That is why financial experts at Tucker Mortgage recommend the ARM loan for people who intend to stay in their homes for only a short time. If you think you will be leaving the home within a five-year window, it may make more sense to save money on your monthly payments by enjoying a lower rate and then selling the house before the interest amount is adjusted. This is a significant gamble, however, and borrowers have suffered financial consequences when they stay past their anticipated move date. This is why ARMs are generally considered riskier, but they can be beneficial for short-term buyers.
For those who want an even lower payment at the beginning of their ARM, the interest-only 5/1 and 3/1 may be the perfect option. Interest-only loans mean that you are only paying interest during the first three- or five-year period. After that time, the interest rate is adjusted annually for the remainder of the 30 years. The mortgage's principal is not being paid down at all; during the introductory period, you are only paying interest on the loan. Who would benefit from this type of arrangement? Most experts say that the best candidate for an interest-only loan is someone who intends to pay off the loan in full before the interest-only period ends. Further, if you are looking to purchase a new home but are having difficulty selling your old residence, it could give you some breathing room while you wait for prices to rise so you can make the sale.
Borrowers can always choose to refinance an interest-only or traditional ARM, but this can be a potentially costly move, considering the thousands of dollars required to complete the process. It is important to weigh the advantages of an ARM over the fixed-rate option, considering that the ARM may ultimately cost more over the long term.
Special Types of Loans: USDA and VA
Certain populations of people may be eligible for special loan terms through two government agencies: The United States Department of Agriculture and the Department of Veterans Affairs. USDA loans are designed to help low-income Americans purchase, repair and renovate homes in rural areas of the country. In order to qualify for this type of loan, the borrower must have an income that falls between 50 and 80 percent of the area's median income; in other words, they are generally considered low-income borrowers. Terms of the loan may extend up to 38 years for those who have exceptionally low incomes. Houses purchased through this program must be considered "modest" for the area, and they also have to meet a laundry list of other standards. Low-income borrowers who are considering purchasing a rural home should consult their lenders to learn more about the USDA subsidies and loan programs.
Loans through the VA are only available to those who have served in the military, including the National Guard and Reserve. To be eligible for these loans, borrowers must be either veterans or active duty. There are a variety of service limits that must be met in order for the borrower to be eligible, as well. For example, any veteran who has been serving from 1990 to the present must have served for 24 continuous months, among other requirements. National Guard and Reserve members must have served for at least six years before being placed on the retired list, receiving an honorable discharge or being transferred to a Standby or Ready Reserve unit. VA loans offer terms and interest rates that can be more favorable for military members than loans available on the open market. Professionals at Tucker Mortgage may be able to help veterans learn more about their eligibility for these special loans.
As you can see, there are a number of mortgage options that may be available to borrowers during the home-buying process. It is important to carefully consider your financial situation and project your desired future payments before committing to a mortgage loan. Consulting a financial expert at Tucker Mortgage may help borrowers understand the risks and benefits of each type of loan. Even a risky loan might be appropriate for your personal situation, depending on your needs and plans! Do not discount any of the loans simply because they offer a non-traditional format. Check with a mortgage professional to determine which mortgage is right for you!
Indiana Housing – IHCDA
Qualifications for all of IHCDA's homebuyer programs are determined by your total household income being under the program income limit for the county you are purchasing your home in. IHCDA does have programs that do not require you to be a first time homebuyer. A borrower can also qualify for 3-4% down payment assistance, depending on the type of loan financing, based off of the sales price of the home being purchased. The assistance comes in the form of a second mortgage, but carries no interest and no payments. The down payment assistance funds must be repaid in full if the borrower chooses to refinance or sell in the first two years of owning the home. After two years, the down payment assistance is forgiven with IHCDA and turns into equity in your home.