You did it! You saved up that down payment and are ready to buy a house. But how do you pick the best mortgage?
It is important you work with a mortgage broker who has your best interests at heart and can tell you how to pick the best kind of mortgage. How great would it be to sit down as an already educated consumer on best mortgage types? Stick with me for the following details. I'll do my best to keep the break down simple so you know how to pick the best mortgage for you.
In a low-interest-rate environment, fixed rate mortgages are all the rage. But as interest rates begin to rise, adjustable rates start to look a whole lot more appealing. ARMs (Adjustable Rate Mortgages) usually have lower interest rates, at least to start, but often come with a 5-1 or 7-1 ARM where interest rates are fixed for the first five to seven years but begin to adjust annually after that.
This can lure you into a situation where when that time period ends and that rate starts adjusting, you are left scrambling to refinance. When it comes down to it, don't risk losing a leg. Lose the ARM and stick with a fixed rate mortgage.
It's called that because it is exactly that. Conventional. These are often the mortgages with the lowest fees and strings attached; however, they often require 20% down to qualify. Despite the large down payment, it is usually the best option and is more favorable because it helps you avoid PMI and reduces your monthly payment on account of the initial large down payment. Because of their affordability, a conventional mortgage may be the best mortgage for you.
The Federal Housing Association purposely designs these loans for the first time home buyer. However, only requiring a 3.5% downpayment can lead to first time homebuyers buying too much house. Without at least 20% down PMI is often required which can add $100 a month per $100,000 borrowed. No thank you! A government run program that requires a small down payment might seem tempting, but it doesn't mean it is the right move for you.
Specifically designed for veterans and backed by the Department of Veteran Affairs, it allows for buying a home with nothing down. However, it also comes with additional fees. And, not requiring a down payment? Well, should the market take a dip, you could easily end up owing more than the house is worth. The intentions here are good but the method is all wrong.
The US Department of Agriculture provides a specific program for rural borrowers of certain income levels and is managed by the Rural Housing Service. These mortgages are subsidized, based on income, and what they give the buyer is recouped when the house is sold or refinanced. The recoupment process can be a very aggressive one too. There are prepayment penalties and restrictions as well. Unfortunately, these mortgages are more about getting people into homes who really aren't in a position to be homeowners. This is one to avoid!
This is where the lender is paying you a mortgage payment while you sell them equity in the property in exchange for those payments. This type of mortgage has become popular with some elderly who didn't prepare well for retirement. It is very dangerous! With a traditional mortgage, the grand total goes down; but, with a reverse mortgage, the total rises over time. You are putting your home at risk and the fees are terrible. Instead, you should question why you are risking something you have already paid for. Run from reverse mortgages!
The idea here is to make extra payments either weekly or bi-weekly so you pay off your mortgage sooner. Making extra payments is never a bad strategy if done appropriately, but there is no reason to pay a lender an extra fee just to operate in this mode. Not to mention, if this is the way the loan is structured initially and you want to change it later, you will have to refinance. You can make a proactive plan without going this route.
In this situation, the buyer takes out a loan and makes interest only payments for the first five to ten years. Later, the buyer makes both interest and principle payments and the interest starts to fluctuate. Eventually, payments become a lot higher.
This is one of those creative loan schemes that got people into the housing bubble before the bubble burst. Well, I hope this informational helps you avoid those bad mortgages and find the best mortgage for you. My recommendation is to stick with a fixed-rate conventional mortgage and have a mortgage payment that hovers around 25% of you monthly income, that way you can find more money to fund your dreams! For more information on this subject, check out my previous Savvy Saturday video, "A Simple 4 Part Recipe for Secure Homeownership." Come join my FREE Facebook community, The “Strong Together Money Community.” to stay informed and encouraged on your financial journey!
Question: Are you in the process of seeking homeownership? Have you pursued or thought about one of the mortgages I just mentioned? Feel free to share your thoughts and be sure to check out my free e-book to help you find that best mortgage and fund your dreams.