Understanding Different Types of Mortgages & How They Can Help You Save
When purchasing a home, there are various mortgage types to select from. Being informed early on about your options can help you save money in the long run.
The most popular mortgage type is a fixed-rate loan, which features established interest rates over an agreed upon period (usually 30 years). Shorter loan durations are becoming increasingly popular as well.
Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs), also known as adjustable-rate loans (ARMs), start out with lower interest rates than fixed-rate loans. However, their price can increase after the introductory period ends and your rate resets. Furthermore, ARMs tend to be more volatile than fixed-rate mortgages in that their initial interest rates may change every few months.
ARMs typically follow an index set by the financial industry, and their interest rates can change according to changes in that index. Your loan paperwork will include a list of indexes used to calculate your ARM’s interest rate and monthly payment.
Some ARMs are tied to the same index for the entirety of your loan, while others use a different index at certain intervals. As a result, it can be challenging to accurately forecast how your ARM will perform over time.
Many lenders provide caps on how much an ARM’s interest rate can increase over time. Typically, these caps are set at 2 percent at the initial adjustment and 2% for subsequent adjustments.
These caps exist to safeguard borrowers against rapidly rising interest rates that could result in large payments. Unfortunately, these measures may not always be successful.
If you’re uncertain whether an ARM is suitable for you, take into account whether you plan to remain in your home long-term. If so, then a fixed-rate mortgage might be more suitable.
Consider whether or not you plan to relocate within the next couple of years. If so, an ARM could make more financial sense since your interest rate can be reset at a lower introductory rate and payments become more manageable.
Before selecting an ARM loan, it’s essential to understand your objectives as these loans can be highly volatile. Homeowners who fail to sell or pay off their homes before the introductory period ends may see significant increases in their mortgage payments.
Some lenders provide ARMs with low introductory interest rates and no cap, making them an appealing option for first-time homebuyers looking to save money upfront. Furthermore, these mortgages usually feature more relaxed credit requirements and lower debt-to-income ratios than conventional mortgages.
Jumbo Mortgages
Jumbo mortgages are home loans that exceed the federal limits set by Fannie Mae and Freddie Mac. If you’re in the market for a large home, such as one in an exclusive neighborhood, a jumbo mortgage might be your best bet.
These loans can be an excellent way to save money in the long run, as they typically carry lower interest rates than conforming or FHA loans. Furthermore, you have more flexibility with them as you can choose from various financing options tailored to fit your needs – such as fixed-rate and adjustable rate mortgages (ARMs).
If you’re thinking about applying for a jumbo mortgage, it’s essential to comprehend how these loans differ from traditional ones. First and foremost, since jumbo mortgages aren’t government-backed, lenders tend to impose stricter requirements and conduct an in-depth underwriting process in order to mitigate risk. As such, lenders may charge higher interest rates on these loans than conventional ones do.
Second, jumbo mortgages typically require higher down payments than conforming loans. Lenders typically require anywhere from 10 percent to 20 percent in cash-down, though sometimes more.
Before applying for a jumbo mortgage, it’s wise to save up some money as a down payment. Some jumbo lenders require applicants to possess cash reserves–liquid assets–that can cover six to 12 months worth of mortgage payments and closing costs.
Additionally, making a down payment can reduce your overall costs if you need to pay private mortgage insurance (PMI). According to Rocket Mortgage, for example, making 10% down payment could result in savings of $6,000 over the life of the loan in annual fees.
Jumbo mortgages can be an excellent option for those searching to purchase a large home, but it’s essential that you weigh all your options before making any decisions. A qualified lender will guide you through the intricacies of jumbo mortgages and help determine which loan works best in your individual circumstance.
To guarantee you get the mortgage you need, take time to shop around and compare lenders. Evaluate your credit score, debt-to-income ratio, available cash reserves and down payment amount before making any decisions. Moreover, speak with a financial advisor for personalized advice and recommendations tailored towards you specifically.
FHA Loans
One of the best ways to save on your mortgage is with an FHA loan. These government-backed loans offer several advantages that conventional mortgages cannot provide, including lower monthly payments and no closing costs.
FHA loans can be more accessible than other types of mortgages due to the government’s backing, making them ideal for those with credit issues or not enough cash for a down payment.
An FHA loan is not only easier to qualify for, but it’s usually less costly than other types of mortgages. Since the lender’s perceived risk is lower due to government backing, they can charge you a lower interest rate as well.
Lenders can provide more accommodating underwriting standards for borrowers with poor or no credit. This is a huge advantage to those who have previously experienced bankruptcy or foreclosure.
An FHA loan may be the better option for first-time homebuyers due to their usually low down payment requirement of just 3.5%. This makes them a popular option among those with limited resources for a down payment, particularly those without access to savings accounts.
However, you should remember this is not a guaranteed loan. There are still some requirements you must meet, such as being a first-time homebuyer and making sure your house meets certain minimum property standards.
For a comprehensive list of requirements for an FHA loan, visit the Federal Housing Administration website.
Once you’ve gathered all your documents, complete an application and send it off to the lender. They will review it and contact you with a loan estimate. After reviewing it, you can decide whether to proceed with getting your mortgage or keep shopping around for other lenders.
When applying for an FHA loan, be prepared to share your entire financial history with the lender. This includes two years of tax returns, recent pay stubs and other proof of income.
If you have any outstanding debt, such as student loans or car notes, your lender will use that information to calculate how much you can afford on a monthly mortgage. They’ll divide these payments by pretax income to calculate what amount is affordable based on that ratio (debt-to-income ratio or DTI).
Conventional Mortgages
Understanding Different Types of Mortgages and How They Can Help You Save Mon, 23 April 2019
Conventional mortgages are home loans that aren’t guaranteed by the government. You can usually find them from banks, credit unions or other financial institutions; you could also get one through a mortgage broker.
Conventional mortgages offer several advantages over government-backed mortgages, such as lower interest rates and more flexible loan terms. However, they may not be suitable for everyone due to certain limitations.
Conventional loans typically have higher credit score requirements than government-backed programs do. This could pose a problem for homebuyers with either a low credit score or high debt-to-income ratios.
To be eligible for a conventional loan, your credit score must be at least 620. If it falls below this number, you’ll need to raise it by paying down debt and improving your credit.
Furthermore, you should strive for a low debt-to-income ratio (DTI). Most lenders prefer DTIs of 50% or lower; however, some may offer flexibility.
If you’re looking to pay off your home sooner and build equity more rapidly, conventional mortgages offer 15- and 20-year fixed rate options with lower monthly payments than 30-year loans; however, keep in mind that you will pay more interest over the course of the loan.
Another advantage of a conventional mortgage is that you can cancel private mortgage insurance (PMI) once you reach 20% equity in your home. This could save money over time if you have excellent credit and no other large debts.
The primary disadvantage of a conventional mortgage is that it typically requires you to put down at least 20% as a down payment. While this may pose an obstacle for those unable to make such large amounts upfront, it also makes it simpler to qualify for lower interest rates and favorable loan terms.
Furthermore, conventional mortgages feature higher loan limits than other home loan types such as jumbo mortgages and FHA loans. Be sure to check this limit annually prior to applying.