Which Type of Mortgage Should I Choose?

Which Type of Mortgage Should I Choose?: Financing details are for informational purposes only and should not be relied upon by you. Rates, program terms, fees, and conditions are subject to change without notice. Not all products are available in all states for all amounts. All mortgage applications are subject to underwriting guidelines and approval. This is not an offer of credit or a commitment to lend. Residential Wholesale Mortgage, Inc., dba RWM Home Loans is licensed by the CA Department of Real Estate #01174642 and Department of Business Oversight under the California Residential Mortgage Lending Act. NMLS# 79445

When choosing a home loan, you have many options available to you. How do you know which one to choose? The short answer is that it depends on each individual’s circumstances because each option is designed to serve a specific purpose. Also, some of these home loan options may have less strict qualification guidelines.

The home loan options and details discussed in this article will help you understand some of the most common options available to borrowers. Researching which option works best for you is a great idea, and we are always available to help. Read below for a run down on Fixed-Rate Mortgages, Adjustable-Rate Mortgages (ARM), FHA Loans, VA Loans, and Jumbo Loans.

Fixed-Rate Mortgages

We will get started with the classic loan option: the fixed-rate mortgage. It is fairly straight-forward: the rate does not change throughout the entire lifetime of the loan (unless you are able to refinance in the future for a better rate). The most common terms for fixed-rate mortgages are 15 and 30 years, but there are also 25-year, 20-year, and 10-year fixed-rate options available. The number associated with the fixed-rate product is the number of years it will take to pay off the entire loan balance.

Choosing a longer term will grant you lower monthly payments, but over the life of that loan you may end up paying more interest compared to other fixed-rate mortgages. When you choose a fixed-rate mortgage with the shorter loan term, your monthly payments will be higher since you will paying off the loan sooner. The benefit to a shorter fixed-rate term is the possibility of a more competitive interest rate. Don’t forget, you always have the option of paying a little extra each month to pay off the loan sooner at your own pace.

When is it important to consider a Fixed-Rate Mortgage?

Fixed-rate mortgages are often used by people who:

Value steady and predictable monthly payments
Would like to lock into a specific interest rate until the loan is paid in full
Plan on owning their home for an extended period of time

Adjustable-Rate Mortgages (ARM)

The converse of the fixed-rate mortgage is an Adjustable-Rate Mortgage (ARM), also known as a variable-rate mortgage. For Adjustable-Rate mortgages, the interest rate may change periodically to reflect current financial market rates and may go up or down depending on the current market. The initial loan interest rate is typically more competitive than a fixed-rate mortgage. Because these typically have a more competitive rate, monthly payments may also be lower.

Adjustable-Rate Mortgages do have a fixed component which makes them attractive to many homeowners. You may have heard about various options such as the 3/1 ARM, 5/1 ARM, 7/1 ARM, or 10/1 ARM. The fixed-rate component is associated with the first number shown in the loan product. For example, a 5/1 ARM will have a fixed rate for the first five years followed by an annual adjustment until the loan is paid off.

What about when rates continue to rise, will my adjusted-rates leave me with a sky-high mortgage payment? Luckily for you, the answer is no. There are rate caps in place that limit how quickly the adjustable-rate can change. Adjustment caps come in two forms: the Initial Adjustment Cap and the Lifetime Adjustment Cap. The initial adjustment cap sets the amount that the rate can change on the first adjustment and is commonly set to about 2 percent. The lifetime adjustment cap sets the amount that the rate can change over the whole time period of the loan, and is commonly set at 5 percent but this may also vary.

You may find these adjustment caps and how much your highest possible payment would be directly from your lender. More information can be obtained by viewing your Loan Estimate paperwork provided to you by your lender after applying for the loan.

When is it important to consider an Adjustable-Rate Mortgage?

Adjustable-rate mortgages are often used by people who:

Anticipate declining interest rates
Want to live in their home for a short period of time
Expect to pay off their mortgage at a faster pace

FHA Loans

FHA Loans are backed by the Federal Housing Authority and tend to have have less rigid requirements than conventional loan options. For example, consumers with past late credit payments negatively affecting their score may still be able to qualify for an FHA loan. The FHA also requires that the property has to be owner-occupied as the owner’s primary residence.

This program is a common choice for First Time Home Buyers since FHA loans will allow for 3.5% down payment which may come as a gift from parents. There are some restrictions, however, as loan limits are based on what county the home is located in. For example, a home in San Diego County will have an FHA loan limit of $649,750 dollars for a single family (one unit) home. Other counties, like Fresno, may have 2017 FHA loan limits as low as $294,515 dollars.

One of the other downsides to an FHA loan option is that a borrower will be required to pay for mortgage insurance. Depending on your loan details and down payment, the FHA Annual Mortgage Insurance Premium may never be removed (unless the loan is paid off or refinanced). Make sure to ask about this when looking into the FHA loan option.

When is it important to consider a FHA loan?

FHA loans are often used by people who:

Need flexibility because of past bankruptcy, foreclosure, or late credit payments
Would like to purchase a home with a low down payment
Can not afford a 20% down payment
Have a debt to income ratio over 45%

VA Loans

For most past and current members of the armed forces, the VA loan option is the ideal choice. The VA loan is actually a VA benefit available to active duty military who have been serving for more than 6 months, veterans, retired military, Coast Guard, and reservists/National Guard service members with 6 years or more of service. Spouses of service members who have passed away in or as a result of injuries sustained in the line of duty are also eligible.

The most lucrative part of the VA loan is that there is ZERO (0) down payment required for loans up to $649,750 dollars in San Diego County. VA loans over $1,000,000 are also available, but they require a down payment (contact us for qualification and down payment details). There is no Mortgage Insurance requirement for a VA loan, which makes it particularly attractive for first-time home buyers who are eligible for the program. These loans often have more competitive rates than other conventional loan options, so make sure to compare both products.

The only down side to a VA loan is the upfront VA funding fee, which was put in place to help the VA continue with this benefit. Anyone who became disabled during their time on duty may be eligible to have their funding fee waived. Keep in mind that VA loans are only available for a primary home purchase; investment properties or second homes are not eligible. Contact us to receive your Certificate of Eligibility — we may obtain this for you directly from the VA.

When is it important to consider a VA loan?

VA loans are often used by people who:

Are eligible for the program
Would like to buy a home with zero down payment (depending on your county limit)

Jumbo Loans

To know whether or not you need a Jumbo Loan, you need to know about conforming loan limits. Conforming loan limits are determined by the Federal Housing Finance Agency based on the national average of home values in the United States. The 2018 conforming loan limit is $453,100 dollars nationwide, but this may change in higher cost areas. For example, the maximum conforming loan limit for San Diego County is $679,650 dollars.

Loans between $453,100 and the larger loan limit for higher cost areas are often referred to as “High Balance Conforming Loans”, but what if you need a loan that is even higher than that? That’s where the Jumbo Loan comes in. Jumbo Loans are loans that exceed maximum conforming loan limits, based on your county. The money for these higher loans are provided by private investors, and not by a government-sponsored enterprises such as Fannie Mae or Freddie Mac.

Jumbo Loans tend to have less financing options available and the programs are determined by each private investor who provides the financing. Compared to conventional loans, these generally require a better debt to income ratio for qualifying, better credit scores, cash reserves, and more money down. Many people also associate a Jumbo Loan with higher rates, but there have been many times that Jumbo interest rates are more competitive than those of conforming loans because of investor demand. Down payments for jumbo loans are typically 20 percent or higher, but some programs will allow 15 percent down or even 10 percent down. Lastly, Jumbo Loans still offer all fixed-rate and adjustable-rate options, as well as some special programs such as Interest Only and Investor Financing.

When is it important to consider a Jumbo Loan?

Jumbo Loans are often used by people who:

Need a loan that is over their local conforming loan limit
Want to buy a high-value home and only put 15 to 20 percent down
Want to utilize an Interest Only home loan finanicng
Need a loan as high as $3,000,000 (loans to $15 Million may be available)

So Which Home Loan is the Best Option?

Your circumstances define when you will be better off with one loan product over the other. In some cases, program guidelines may prevent you from choosing a specific loan, like with Jumbo Loans. Of course, this guide is only the tip of the iceberg, and there are many other loan products available. Get in touch with one of our Loan Officers today to find out which program may be an appropriate option for your needs. If you feel that these programs may not be the best option for your situation, please reach out to us as soon as possible for other special loan program availability.

We are here to help guide you and answer any questions you may have. If you are interested in a preparing for your home purchase or saving money with a refinance, contact us and our team will set you up with the right plan for your specific goal. Call Us at (800) 865–6266.

Originally posted at https://rwmloans.com/blog/what-is-the-proper-home-loan-to-choose by Christophe Bassett.