These days, it’s the norm to have a mortgage when you buy a house. Mortgages allow you to afford and purchase a home much quicker than without a loan. When it comes time to buy a home, there are multiple options of mortgages to choose from.
*Note: This blog will focus on the general descriptions of what the main types of loans offer. For detailed descriptions and finding out which is best for you and your financial situation, speak to your lending professional. If you want a recommendation for a lender, call your real estate agent and find out who they recommend.
Fixed-rate mortgages are easy to break down. It has a fixed interest rate and payment for the duration of the mortgage. This is good for first-time buyers who may not be able to compensate for rising interest rates, or those who plan to live in the house for close to the time of the mortgage. Fixed-rate mortgages are typically 15 or 30 years, but can be set in 5 year increments for between 15 and 40 years. Shorter mortgage terms mean a higher interest rate and payments, but the loan will be paid off sooner. Longer terms have lower payments, but longer payoff period.
Adjustable-rate mortgages (also called ARMs, floating-rate or variable-rate mortgages) have an interest rate that is tied to the benchmark rate (aka prime rate) created by the lender. This means that the rate can go up or down depending on the changes in the prime rate. ARMs are determined by two numbers: the first is the number of years the introductory rate is locked in for. The second number is how often the rate adjusts. For example, a 7/1 means the loan rate is fixed for 7 years, then it adjust every year after that.
ARMs are good for buyers who may move or refinance in a short term before the introductory rate period is over, or if interest rates are likely to fall, resulting in lower payments.
The most prevalent government mortgages are Veterans Affairs (VA) and Federal Housing Administration (FHA) loans. FHA loans are geared toward first-time home buyers, offering lower down payments than conventional loans. This article helps provide information about how much down payment you need with certain loans. VA loans can offer up to 100% financing and lower interest rates for military and former military. Speak to your lender about VA loan eligibility and rates.
Interest-only loans allow the borrower to only pay the interest portion of the mortgage payments for a set period of time. The downside is that these loans tend to cost more over the life of the loan, but the payments are lower.
Jumbo mortgages are for borrowers that need to take out loans for larger sums of money than Fannie Mae and Freddie Mac will allow. The maximum amount for a Fannie Mae and Freddie Mac loan is $484,350 for a single-family home in most markets across the United States. Jumbo loans can be fixed- or adjustable-rate mortgages, but will have higher interest rates as well as stricter standards for underwriting due to the large amount of money being borrowed.
A reverse mortgage is the opposite of a standard mortgage. In this case, the lender gives you money from the equity built up in the home. This money is paid out in a lump sum, monthly payments, or a line of credit. However, this is not like a home equity line of credit that must be paid back in monthly payments. A reverse mortgage is paid back when the homeowner sells the home or dies. In addition, reverse mortgages are only available to homeowners over 62 years of age and must own the home outright or at least have 50% equity.
Two things to watch out for with reverse mortgages:
- Despite having no monthly payment requirements, if the homeowner does not make required property tax or home insurance payments, the lender can foreclose the home. This creates a lien on the property.
- The interest on a reverse mortgage is not tax-deductible.
Hopefully, this article helps shed some light on what types of mortgage options are out there for home buyers. Like we said above, consult your lending professional about which type of mortgage is best for you.
If you are ready to start your home buying journey, take a look at our listings or call our local expert agents a call at 208.724.9636. We are excited to help you have an amazing real estate experience.