Blue Door Realty Group
Stacy Tarrant
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Blue Door Realty Group
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Mortgage Guide

When buying a home, it can get confusing when it comes to mortgages and choosing the right type of mortgage to fit your needs. A worthy lender will be more than willing to explain the differences with mortgages and provide the benefits and drawbacks to each. Research you mortgage options well before you make an offer on a new home. The following is an explanation of the most common types of mortgages.

Conventional Loans or Fixed Rate Mortgages

A conventional loan may be your best option if you have:

  • Excellent credit history
  • Funds available for down payment on a purchase
  • You plan on living in your new home for many years
  • You prefer the stability of knowing how much your payment will be each month

Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan.

If your down payment or equity amount is less than 20% of the property value, you will also need to obtain private mortgage insurance (PMI).

The downside to conventional loans is that they typically have tighter credit requirements and a higher down payment required.

The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:

15-Year Fixed-Rate:

  • You will be able to pay off the loan in half the time of a 30-year loan.
  • You equity builds up more quickly than in a 30-year loan.
  • Payments are higher (which may be a problem if you lose your job or become unable to work).
  • You will pay less interest over the life of the loan.
  • You will often a lower interest rate compared to a 30–year loan.

30-Year Fixed-Rate:

  • The most common choice, especially for first-time homebuyers, as it’s the easiest of the fixed-rate loans to qualify for.
  • Monthly payments are lower than for 15-year loan. This can prove especially helpful if you do not have a lot of “padding” between the amount you can afford to spend and the monthly payment for your desired property.
  • More desirable if you plan on staying in the same home for many years since equity builds more slowly than for shorter-term loans.
  • For income tax purposes, this term provides the maximum interest deduction.

Jumbo Fixed-Rate:

Jumbo mortgages are home loans that exceed $417,000 which is too big to be sold to Fannie Mae and Freddie Mac because they exceed the agencies’ conforming limits.

Government Loans

Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.

Federal Housing Administration (FHA) Loans allow for lower down payments and typically have fewer restrictions on your credit history than conventional loans. These loosened restrictions are possible because the government insures your loan.

FHA loans require you to pay an “Upfront Mortgage Insurance Premium”. In most cases borrowers choose to include this fee in the amount of their mortgage.

  • Allows for lower down payments than conventional loans
  • Loosened credit requirements
  • Less loan-level pricing adjustments (variations to rate and closing costs based on your        credit history, property type, and ratio of your loan amount to your property value)
  • Lower maximum loan amounts
  • Need to pay Upfront Mortgage Insurance Premium
  • Fewer product options

Veterans Affairs (VA) Loans require that you be a qualified veteran to be eligible. VA loans allow for no down payment and offer more liberal requirements related to your credit history. These loosened restrictions are possible because the government guarantees your loan.

VA loans require that a special VA Funding Fee must be paid. This fee is typically financed and varies depending on your personal situation. You will need to obtain a Certificate of Eligibility (COE) before obtaining a VA loan. For additional information, visit the Department of Veteran’s Affairs informational page.

  • Allows for no down payment
  • Loosened credit requirements
  • Less loan-level pricing adjustments (variations to rate and closing costs based on your credit history, property type, and ratio of your loan amount to your property value)
  • Need to pay VA Funding Fee

The bulk of your monthly mortgage payment goes toward paying off the principal and interest of your loan. In addition, most lenders require that you pay a sufficient amount to cover your local real estate tax, plus your homeowner’s or hazard insurance. To make it easier to pay for the last two, your lender provides a service called escrow. The bank holds the money for you, and then, once a year they send the taxes to the tax assessor, and the insurance premium to your insurance agent. It’s convenient because it spreads the big annual cost over twelve monthly payments, and the bank takes care of the transactions for you. Remember, tax rates change from year to year, so the previous year’s tax bill should be considered simply as a ballpark figure of what you would pay.