After selecting the perfect home, it is important to choose the home loan that best suits your needs. Your Mortgage Broker will assist you in selecting the right home loan program. The agents at Condo4Sale and Northeast Property Group have long standing relationships with many reputable local lending agencies that specialize in establishing the right financing for you. Some of the options are:
- Fixed Rate Loans – offer a set interest rate and payment amount for the full length of the loan, usually 15 or 30 years.
- Adjustable Rate Mortgages (ARM) or Variable Rate Loans – may start with a lower interest rate than most Fixed Rate loans. The interest rate on these loans changes after a predetermined amount of time and the monthly mortgage payment adjusts accordingly. After a preset payment period (usually 1, 3, 5, or 7 years) the interest rate may adjust (usually semiannually or annually) on the basis of the movement of a specified index. As the interest rate adjusts, the mortgage payment will also adjust.
- FHA Loans – are insured by the Federal Housing Administration. FHA loans allow homebuyers to put as little as a 3.5% down payment on a home. These loans also allow the down payment or closing costs to be paid by a gift. FHA loans may not be available on all properties.
- VA Loans – are guaranteed by the Department of Veterans Affairs and are available to veterans and those currently serving in the military. VA loans are often made with little or no down payment. VA loans may not be available on all properties.
The above mentioned loan programs are general examples of the types of loans that may be available to you when purchasing. Whether any particular loan program is available to you will be based on your ability to meet that loan program’s underwriting guidelines.
How To Choose The Right Loan
There are a number of factors that must be considered when choosing a loan program. Your Mortgage Broker will ask you to consider the following questions when making your decision:
How long do you plan on owning your home?
If you plan to own your home longer than 5 years, conventional wisdom suggests that a Fixed Rate loan may be the most appropriate for you. Although the interest rate on Fixed Rate loans may be higher than the initial interest rate on Adjustable Rate loans, Fixed Rate loans have a fixed interest rate and a consistent payment amount for the life of the loan, typically 15 or 30 years.
If you plan to own your home less than 5 years, you may want to consider an Adjustable Rate Mortgage (ARM). The initial interest rate on an ARM May be lower than a Fixed Rate loan, which will result in lower monthly payments for the initial set period of the loan. One of the disadvantages of an ARM is that after the initial period (typically 3, 5, or 7 years) the interest rate on the loan adjusts periodically in accordance with market conditions (typically limited by an interest rate cap). In a rising interest rate environment your monthly payment could significantly increase as a result of these adjustments.
Will your finances change over the next few years?
If you are retired or nearing retirement and living on a fixed income you may prefer a Fixed Rate loan. A Fixed Rate loan will provide you with peace of mind that your mortgage payments will remain the same and you will not have any surprises when budgeting for your monthly expenses.
If you expect your income to increase over the next few years you may want to consider an ARM loan. Your initial interest rate will be lower with lower monthly payments that may increase as the loan matures. The lifetime interest rate cap of the ARM loan prevents the interest rate from increasing past the set cap.
How much of a down payment can you afford?
There are loan programs available to accommodate smaller cash down payments. Homebuyers who make down payments of less than 20% of the purchase price of a home will most likely have to pay mortgage insurance which is added to the monthly mortgage payment.
Many cities and counties also have Down Payment Assistance Programs for qualified buyers. You can contact your local city or county office to find out if these programs exist in your area and whether you are qualified to participate in any program or discuss available options with your Mortgage Broker.
Do you want to pay off your mortgage quickly?
If you are interested in paying off your mortgage quickly and saving money by paying less interest, a short-term mortgage (with a higher monthly payment as compared to a typical 30 year loan) may be your best option. There are a number of options available, including 15- and 20-year Fixed Rate mortgages.