The best type of mortgage for you is one that you can live with as long as you live at home. Regular 15 or 30 year mortgages, adjustable rate mortgages, FHA loans, VA loans and large loans are the most common types of mortgages.
Determine How Much Home You Can Afford
Before you think about what type of mortgage you need, you need to figure out how much you can afford. Our mortgage calculator will help you estimate the monthly payment for different types of loans and interest rates. You can also talk to a real estate agent or lender about your budget.
Understand the total cost of a home
The total home value is more than just the ad price. You may also need to pay closure, down payment, and relocation costs. They vary from state to state, but can range from $ 1,100 to $ 29,000.
Connected: The Complete Guide to Closing Costs
You will also have monthly mortgage payments, which should include interest and property taxes, and homeowner’s insurance if you don’t already have a policy.
In addition to these basics, there are other fees that are associated with the purchase of your home, such as appraisal or inspection costs. Again, this depends on where you live, so it is important not to get caught up in this blind.
How financially stable are you?
Before taking on a mortgage, it is important to understand your financial stability. If your place is not very good, it is best to wait until your income is higher before taking on this type of commitment.
This can be difficult for some people who have more than one loan or are still paying off student loans, making them unable to afford the larger monthly payments associated with buying a home.
If you feel financially stable enough to buy a home and your job prospects seem safe, this is probably a good idea. But if things are unstable at work, you are unhappy with your job or do not feel financially secure, it may be better to wait a bit.
When can you move?
If you think you are going to move in a couple of years, it might make sense to rent or consider an adjustable rate mortgage. But if you’re planning on staying in the home for a long time, a 30-year fixed mortgage can make a lot of sense to you.
Connected: Which is better: rent a house or buy?
Plan to save on upfront costs
When buying a home, you will be faced with several upfront costs: down payment, mortgage insurance premium, taxes, and more.
Therefore, it is useful to establish a savings target in advance to cover these initial costs.
For example, if you are planning to reduce the value of your home by 20% and you have a purchase price of $ 250,000, that means that your initial cost is at least $ 50,000.
There is an easy way to find out what you can afford: the rule of thumb is 28%.
It states that your monthly housing expenses should not be more than 28% of your monthly gross income. So, for example, if your gross monthly income is $ 5,000 per month, you will want to add up the mortgage, property taxes, and PMI (private mortgage insurance) of the home you want. Under this formula, your monthly mortgage payment should be less than $ 1,400 per month.
Choose a suitable mortgage term
Most people buy houses with their mortgage. There are different terms for which you can get a mortgage.
Some people prefer to pay more interest and get a loan for 30 years, while others would prefer to get a loan for 15 years with higher payments but lower interest.
You can also get shorter and longer time frames than this; it just depends on what your lender is offering. However, the goal here is to choose the most suitable mortgage term for you.
Choose the appropriate type of mortgage
The different types include conventional mortgages, FHA loans, VA home loans, or large finance. You can also use an adjustable rate mortgage if you need a low starting interest rate but plan to own it for less than seven years before selling or refinancing. Here are some of the more common options:
Ordinary loan
A regular loan is a traditional financing option that allows buyers with good credit ratings to take out home loans. Historically, you have to deposit at least 20% up front, but much less can be deposited these days. Typically, these loans have 30-year fixed-rate maturities that do not change over time as long as you pay your monthly installments every month on time and stay current.
FHA Loan
An FHA loan is a mortgage loan that is insured by the Federal Housing Administration. FHA loans are popular with people with lower credit ratings or those who do not have enough cash to cover the down payment and closing costs because they only allow borrowers to deposit 3%.
Moreover, if you use this type of financing, the borrower may not be charged any personal expenses at all, unless they choose otherwise. Fees can include an application fee ($ 60), an appraisal fee (typically $ 500-700), and a MIP or mortgage insurance premium, which is currently 1.75% of your base loan amount.
VA Credit
The Veterans Administration can guarantee a VA loan for veterans, active military personnel and surviving spouses for 100% of the purchase price, even if you do not pay the down payment.
One significant difference between an FHA and VA loan is that your monthly housing costs cannot exceed 31% of your income in order to be eligible for the loan.
What are the pros and cons?
The biggest advantage of this type of financing is convenience: you can avoid paying for private mortgage insurance (PMI) entirely – no matter how much you put into your home, as long as it doesn’t exceed 80%.
Another major benefit is that the borrower may not have any cash costs at all other than closing costs or fees, which differ depending on the home you buy and where you live.
Jumbo loan
Large loans are funding that exceeds the mortgage limits set by Fannie Mae and Freddie Mac.
The large loan limit is US $ 548,250 (with some exceptions).
A lender may charge more interest on that amount than on something less expensive: home buyers may have to pay four or five percentage points more than those with regular loans because there is a higher risk.
However, borrowers can walk away without paying any private mortgage insurance, as it only applies up to 97% LTV (the ratio of the loan amount to the value).
Adjustable rate mortgages
An adjustable rate mortgage (ARM) is a mortgage with a periodically changing interest rate. As your interest rate fluctuates, so does the payment amount.
The main benefit of an ARM mortgage is that it starts with a small monthly payment.
They can be ideal for people who plan to live in one place for only a few years when the interest rate is low.
ARM can also work great if you have enough money saved up, so even if your payments go up, you will still be comfortable paying them every month.
Other types of mortgages
In addition to the options shown above, you can get several more types of mortgages:
- A reverse mortgage is an option for seniors who want to use their home equity while continuing to live in the home. This type of loan does not require monthly payments, but you must be at least 62 years old and have a free and clear residence, or this must be your primary residence.
- HECM is similar to a conventional loan on many levels (for example, a high credit rating is required) and offers some unique benefits that may not exist with other mortgages. Suppose you cannot continue to pay your mortgage due to old age or disability. In this case, this type of financing can pay off the balance if you meet certain criteria related to income and assets.
Understand how mortgage interest rates work
Mortgage interest rates depend on how long you borrow money or the term of the loan.
Long-term rates will be higher, while short-term rates will generally be lower. A popular rule of thumb is that people should plan to reside in their home for at least four years before refinancing or selling it. Consequently, they have enough capital created after the principal and interest have been paid.
Interest rate quotes depend on three factors: the creditworthiness of the borrower (his payment history), the degree of risk that the lender wants to take on (i.e., how well can this person do the job of managing debt?) And market volatility. Market volatility helps determine whether loans need to be fixed on fixed terms to better protect against potential changes in interest rates or general economic changes.
Choose a good lender
When you are ready to start looking for mortgages, you will need to find a reliable mortgage lender. Here are some tips for choosing the best mortgage provider:
- Take a look at the rates. One of the most important factors to consider when comparing mortgage rates is the annual interest rate or the annual interest rate. You will need a price that you can afford for your budget and lifestyle.
- Customer service. It is imperative to find a lender who offers helpful customer service and is willing to assist you in the process.
- Availability of goods. You will want to consider which type of mortgage best suits your needs – fixed versus adjustable, 15 or 30 year loan, etc.
- Loan options are available in your area. Many lenders offer services nationwide, but some may be more limited by regional lending requirements. Use this information when selecting potential vendors so you can work with any geographic restrictions on loans eligible for purchase in your state.
- How long will it take. Typically, it takes six to eight weeks from start (or prequalification) to closing day for most mortgages.
- Down payment required. You will need to deposit a percentage of the purchase price on your property, usually at least 20%, but this depends on how much you can afford up front. The higher the down payment, the lower the monthly mortgage payments will be.
- Closing costs. Closing costs include title insurance fees, attorney, surveyor, or appraiser fees (if not included in the purchase of a home). There is also an appraisal fee (usually $ 250-500 if requested by the lender) and provisions for taxes and accident insurance. Elements of an escrow account include homeowners association fees or homeowner’s warranty coverage.
Bottom line
You can choose from a regular mortgage, an FHA loan, a VA loan, or an adjustable interest rate mortgage. How long you plan to stay at home should influence your choice. You will also want to find out what you can afford using the 28% rule.
Connected: 5 ways to calculate how much home you can afford
As always, when making any big decision, make sure the choice is best suited to your particular situation and lifestyle before making your final decision.