When buying a home, majority of us don't have that kind of cash laying around so we talk with a lender and obtain a mortgage for the purchase. Mortgages come in all shapes and sizes: Fixed or Adjustable Rates, Conventional or Government Insured, 5 to 30 Year Terms, and so on. In this blog, I will break down the most important pieces of mortgages to better assist you in saving money in the long run!
First, let's talk about types of mortgages.
Conventional mortgages - Ideal for borrowers with strong credit (around 620+ score), a stable income (debt to income ratio of 45-50%) and solid employment history, and a down payment of at least 3 percent.
Jumbo mortgages - Jumbo loans make sense for more affluent buyers purchasing a high-end home. Jumbo borrowers should have good to excellent credit, a high income and a substantial down payment. Many reputable lenders offer jumbo loans at competitive rates.
Government-insured mortgages - (FHA, VA, USDA lonas) Ideal if you have low cash savings, less-than-stellar credit and can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for military borrowers.
Basically, what type of loan you acquire is going to be based off your credit score, down payment, purchase price, home location for USDA loans and military status for VA loans.
When obtaining a mortgage, you also will be offered a choice between Fixed or Adjustable Rates.
Fixed-rate mortgages - Keep the same interest rate over the life of your loan, which means your monthly mortgage payment always stays the same. Fixed loans typically come in terms of 15 years, 20 years or 30 years.
Adjustable-rate mortgages (ARM) - Have fluctuating interest rates that can go up or down with market conditions.
Another decision to make when obtaining a mortgage will be the term (how many years you will have to pay the loan). This choice affects: your monthly principal and interest payment, your interest rate and how much interest you will pay over the life of the loan. In general, the longer the loan term, the more you will pay.
Shorter terms will generally save you money overall, but have higher monthly payments.
There are two reasons shorter terms can save you money:
You are borrowing money and paying interest for a shorter amount of time.
See AlsoCurrent Mortgage RatesThe interest rate is usually lower—by as much as a full percentage point.
Last, but definitely not least, is Mortgage Insurance. If you can’t afford a 20 percent down payment, you will likely have to pay for mortgage insurance. Depending on the loan type, you will pay monthly mortgage insurance premiums, an upfront mortgage insurance fee, or both. Mortgage insurance protects the lender if you fall behind on your payments. It does not protect you. This can drastically add more to your monthly payment. If you do not have 20% to pay down when purchasing a home, more than likely, Mortgage Insurance will be a part of your monthly payment. If that is the case, as it is with many home buyers, the good news is once you have paid down to 20% of the APPRAISED VALUE, you can call and request the Mortgage Insurance to be removed from your loan! AGAIN, it's 20% of the appraised value NOT 20% of the original loan amount.
Example:
Home purchase price: $100,000
(for easy math, let's just say that's the loan amount)
Appraised Value $120,000
(done by appraiser before loan can be approved - has to be more than loan amount)
20% of Appraised Value is $96,000
So once your loan is paid down to $96,000, you can have your Mortgage Insurance requested to be removed. On our loan, our Mortgage Insurance was around $55 per month! Think of the savings!!
Let's RECAP:
What type of loan you get depends on credit score, down payment and purchase price. Having a good credit score helps you acquire better interest rates which in turn saves $$!
Doing a shorter term means less interest to pay in the long run. Have your lender show you the difference in monthly payment amounts for 20 year vs 30 year. For our payments, it wasn't as big of a difference as we thought!
Having a fixed-rate keeps your payment the same each month (outside of changing tax and insurance costs). The market can be unpredictable and with rates at record lows right now, locking them in at a fixed rate is a reassuring win!
Mortgage Insurance can be avoided with a 20% down payment OR removed after 20% of Appraised Value is paid. This can literally save you thousands. Mortgage insurance is protection for the lender, not you.
My husband and I did a conventional 20 year loan. We immediately had the mortgage insurance removed when 20% of the value was paid and we continually pay any additional funds towards the principal. In doing so, where you pay interest on the balance each month and the way loans are amortized (keep an eye out for my next blog), it has drastically chipped away at how much we owe.
If you already have a mortgage, don't forget you can save too by refinancing!! If the rate you can obtain now is lower than what you were originally locked into, refinance to lock in a lower rate and maybe even a shorter term!!
I am a licensed Real Estate Broker for the State of NC. If you have any questions on loans, saving $$ or the home buying process, please feel free to reach out! You can email me at kimweaver@kw.com or send me a chat through This Organic Love's webpage!
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