Choosing a mortgage loan years ago used to be like buying a car in the days of the Model T. As the old joke goes, buyers could have any color they liked as long as it was black. The same was true with mortgage financing. Homebuyers could pick any loan, as long as it was a 30-year fixed-rate with 20 percent down.
Today, consumers have a wide variety of loan options from which to choose. In fact, with so many different types of mortgages available, selecting the right one can seem overwhelming. But the good news is that an experienced mortgage loan expert from a company like Princeton Capital, Coldwell Banker Residential Brokerage’s mortgage affiliate, can clarify your options and help you select the mortgage that is right for your own personal situation.
Choosing the “best” mortgage product really depends on your financial circumstances, how much you intend to put down, how much home you’re looking to purchase, how long you intend to stay in the home, and many more issues. According to Princeton Capital, some of the choices that may be available to you include:
- Fixed-rate mortgages. While buyers can still pick the traditional 30-year fixed, they also have the option of selecting fixed-rate loans over 10, 15, or 20 years. In fact, borrowers can even pick a 40-year period in some cases.
The advantage of a fixed-rate mortgage is that you always know what you will pay every month for the life of the loan. So if interest rates go up, your monthly payment won’t be affected. Conversely, you wouldn’t benefit if rates go down unless you refinanced.
Fixed-rate mortgages are typically recommended for those who intend to live in their home for quite a while, usually at least five years or longer. The 10-year and 15-year fixed product may be good for those looking to refinance their mortgage and pay off their home faster.
- Fixed-period adjustable rate mortgages. These loans, often referred to as “hybrid ARMs,” feature an initial fixed interest rate period, after which the interest rate becomes adjustable for the rest of the loan term. These periods that these loans remain fixed are typically three, five, seven or 10 years.
Advantages of hybrid ARMs: They generally offer lower rates during the fixed period than traditional fixed-rate mortgages. But once the introductory period is over, the rate is subject to change based on the financial index to which the rate is pegged. If interest rates are rising, your monthly payment could rise as well.
If you believe interest rates are likely to go down in the future, this may be a good choice. But a word of caution that rates are already low by historic levels. A hybrid could also be the right option for someone who intends to stay in their home for only a limited period of time and plans to sell their property before the fixed period ever expires.
- FHA and VA Loans. Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans are popular homebuyer choices because they require a lower down payment and credit score than conventional loans. But there are eligibility requirements and maximum loan limits, so they’re not for everyone.
FHA loans are private loans insured by the federal government. They’re popular with borrowers who don’t have enough funds to pay a traditional down payment because they require only 3.5 percent down to qualify. But borrowers are required to pay mortgage insurance, which slightly increases their monthly payments. Additionally, there are loan limits on FHA loans based on the cost of housing in a particular county, ranging from approximately $271,000 to $625,000.
Like an FHA loan, VA loans are private loans insured by the federal government and are popular with those qualified borrowers who don’t have enough money for a traditional down payment. VA loans can help reduce down payment requirement, sometimes to zero. But VA loans are only available to qualified military veterans and their families and are only available to these individuals for their own primary residences. Also, while there are technically no limits on how much a veteran can borrow using a VA loan, there is a $417,000 maximum amount the government will guarantee on these loans.
The good news in all of this for homebuyers is that there are many more mortgage loan options available today than there were years ago. But finding the right choice for you can be complicated. I would be happy to help answer some of your questions and put you in touch with a mortgage loan professional to get further information. Just give me a call at (408) 410-2060. I’m here to help!