If you’ve never had a mortgage before, you’ll likely be surprised at how many choices you have. Sometimes it can be a bit overwhelming when your loan officer begins presenting your different choices. Lenders can boast about how many different loan programs they have but sometimes it clouds the decision-making process with too much information. But understanding the purpose of a different loan choice makes it easier to select the right loan program for your situation.
There are two primary types of mortgage loans- fixed and adjustable. A fixed rate simply means the mortgage payment will never change because the rate will never change. An adjustable rate, sometimes referred to as a variable rate, can as the name implies change at some point in the future. An adjustable rate mortgage, or an ARM, will adjust at predetermined periods based upon the index upon which the note is based and a margin which is added to the index. An index might be the 1-year Constant Maturity Treasury or CMT. If an adjustable rate mortgage is about to adjust and the 1-year CMT is 2.00 and the margin 2.25, the rate until the next adjustment will then be 4.25 percent.
Many ARMs today are in the form of a hybrid. A hybrid is sort of a cross between a fixed rate loan and an ARM. The hybrid will have an initial fixed rate period before turning into a loan that can adjust every six or twelve months. A 5/1 hybrid, for example, will be fixed for five years before turning into a loan that can adjust once per year. The allure of a hybrid mortgage is the initial rate which will be lower than current fixed rates. The disadvantage is the ARM can eventually be higher than prevailing fixed rates.
For someone that plans on keeping the property for an extended period of time and rates are at relative lows, the better choice might be the fixed rate and avoid the uncertainty of an ARM.
Next is the loan term. The most common loan term today is 30 years but there are other choices as well. Loan terms can be as short as 10 years. You can get a fixed rate loan with terms of 10, 15, 20, 25 and 30 years. The longer the term the lower the monthly payment. The shorter the term, the higher the monthly payment but you’ll pay less in interest over the life of the loan with a shorter term.
Another consideration is a conventional loan vs. a government-backed loan. Both are available as fixed or adjustable rate programs. VA, FHA, and USDA are all government-backed loans and so-called because the lender is compensated for part or all of the loss should the loan go into foreclosure. VA loans do not require a down payment and the borrowers are restricted from paying certain types of closing costs.
Veterans, active duty personnel, National Guard and Armed Forces Reserve members with six years of service and un-remarried surviving spouses of those who have died while serving or as a result of a service-related injury. FHA loans are available to anyone and only ask for a down payment of 3.5 percent of the sales price. USDA loans do not require a down payment but must be located in an approved rural area. All government-backed loans can only be used to finance a primary residence and may not be used to finance a rental property or a second home. These programs are all fantastic options for first-time buyers that qualify.
Once you’ve decided on which type of loan you want as well as the term of the loan, you’ll next be asked to choose an interest rate. Each loan program carries with it multiple rates. The lower the rate, the points you will pay. If a 30-year rate is, say, 4.00 percent without any points you might be able to get a 3.75 percent rate by paying one point. A point is expressed as a percentage of the loan amount. Your loan officer will be happy to provide you with a total list of point and fee combinations and help you decide which is your best option.
And that’s the final point. It’s your loan officer that can help guide you through the decision making process. Don’t think you have to do this on your own, that’s what your loan officer is there for. But your loan officer will provide the solutions, it’s you that ultimately decides which option is right for you.
Please call us today to discuss all the options available today.