Eeny Meeny Miny Mortgage
The vast majority of home buyers use a mortgage to finance the purchase of their home. With average market values ranging from $200,000 to $300,000 (or much higher) not many people have the savings required to purchase a home outright. I know I don’t. Luckily, real estate makes good collateral, which is why an entire mortgage industry has grown up around the buying and selling of homes.
Government Backed Loans
VA Loan: The Veteran Affairs loan is offered to eligible veterans. No down payment or mortgage insurance is required.
FHA loans: Offered to people who meet standard Federal Housing Authority FHA credit qualifications. Downpayment can be as little as 3.5%, but you have to pay a mortgage insurance premium (MIP) for the life of the loan. Talk to your lender about how this fee will cost you over the life of the loan.
USDA: The United State Department of Agriculture offers loans for properties located in rural areas to low-income borrowers. These loans require no downpayment and have low interest rates.
The 3 types of loans listed above are government backed loans. That means that they are insured by government agencies. In other words, if a lender has to foreclose on a non-paying borrower, the agency will buy the property from the lender and sell it to recoup the agency’s losses. By doing so, it insures that the lender won’t lose money if you can’t make your monthly payments.
These loans are good options for buyers who do not have the cash reserves for a 20% downpayment. While you will pay more over the life of the loan, it opens the door of homeownership to buyers.
Conventional Loans are offered directly through the lending institution you are dealing with and are not backed by a government program. If you default on your loan, the bank will foreclose, take possession of the house, and sell it to recoup its losses. Each lending institution will have slightly different criteria as to who they will loan to, and slightly different terms and loan products. However, generally speaking, you can expect a 20% downpayment and a lower interest rate. In other words, you pay more upfront, but much less over the life of the loan.
Adjustable Rate Mortgage
All of the loans we have discussed up to this point are fixed rate mortgages. This means that the interest rate on your loan will not change for the life of the loan. Adjustable Rate Mortgages (ARMs) have interest rates that change every so often. A change in the interest rate will mean a change in the monthly payment. There are a few different versions of ARMs offered. I recommend caution and extensive research if you are considering this option.
While much more can be said about each type of loan, I hope that the information here will provide a snapshot of each loan for easy comparison and understanding. One of the first steps to buying a home, is contacting a lender, and just spending some time on the phone with them discussing these options. I understand that this can be intimidating. Do not worry about “getting sold” or feeling like you don’t know enough. Generally, mortgage lenders are real people who love what they do. It is their job to answer your questions and help you understand your options. Take some notes, build a relationship with that lender, and let them know you are shopping around. You will be surprised how easy and rewarding the experience can be.