If you want to buy a home and you don't have enough money to pay for the entire price of that home as the down payment, you're probably going to have to get a mortgage. Easier said than done, however. There are a number of different mortgages you could qualify for to pay for your home, each with different pros and cons. In this article, Landmark, a company which provides home warranty plans, will help you to decode mortgage lingo and decide which mortgage type is right for you.
Adjustable Rate Mortgage vs Fixed-Rate Mortgage
One of the most common differences between mortgages is the type of interest rate they have. Lenders make a profit by giving borrowers money and then asking for it back with interest. The amount of interest is usually determined by a percentage of the money borrowed. For example, if you get a mortgage for $300,000 with a 4% interest rate, and you pay the minimum payments each month, at the end of the year you'll have paid 12,000. (The only way you don't have to pay as much is by pre-paying on your mortgage. That has to do with paying on your premium versus paying on your interest, which you can learn about here.) With both types of mortgages you have to get home insurance, and it's a good idea to research home warranty plans and get the additional coverage on your home. There are two types of interest rates for mortgages, adjustable and fixed.
Adjustable Rate Mortgage
An Adjustable Rate Mortgage, also known as an ARM loan, has a set (lower) interest rate for a few years. Then, the interest rate adjusts from year to year over the life of the loan. Most of these loans include a cap (it can't go above 10%, for example) and doesn't require mortgage insurance. This type of mortgage is alluring because it shows a lower interest rate at the beginning of the loan, which could help individuals who can't pay as much or are moving quickly. However, the interest rates tend to go up, and that interest goes straight into the lenders pocket, so all-in-all it's generally a better plan to stick with a predictable fixed-rate mortgage. This type of mortgage requires home insurance plans and Landmark also recommends home warranty plans.
Fixed Rate Mortgage
A fixed rate mortgage has an interest rate that stays the same throughout the entire time of the mortgage. These types of mortgages can last between 10 and 40 years. The longer the length of the loan, the smaller the monthly payments will be, but the more you'll end up paying on interest. However, the great thing about a fixed rate mortgage is that no matter how long the length of the loan you'll always know your mortgage payment price. A fixed rate mortgage needs home insurance before you can close on the home. Landmark also recommends home warranty plans to protect your home.
FHA Mortgage vs. Conventional
A Federal Housing Administration loan is insured by the federal government. It protects the lender if the borrower happens to default on the loan. It also asks for a lower down payment of 3.5% on the value of the home. These are available in fixed or adjustable rate mortgages.
This type of mortgage is perfect for individuals who have bad credit or who don't have enough money for a traditional 20% down payment. However, it does come with a price: higher monthly payments!
When a homeowner has to pay less than the traditional 20% down payment on a home, they generally have to purchase private mortgage insurance because they're a high risk borrower. This mortgage insurance protects the lender if the borrower stops making payments. With a FHA mortgage, the borrower must pay 1.75% of the home's value up front, and then a monthly charge called an Annual Mortgage Insurance Premium. This monthly charge depends on the loan size and length of loan. Although this mortgage doesn't require one, having a home warranty plan is a good idea to protect your home's systems and appliances.
This mortgage is not insured by the federal government in any way. This is a traditional mortgage that you can qualify for with a bank or credit union. This mortgage could be a fixed rate or adjustable, but does require a higher credit score, usually above 600. A home warranty plan is another good idea for this mortgage option.
Interest Only Loans
In the previous loans, a borrower paid a monthly payment on the interest and the premium. With this type of loan you pay the interest first, and then pay off the premium. This means that the initial monthly payments are extremely low, but will jump up once the interest is paid off. However, you're not building equity in your home, and you'll be paying much more interest than if you try and pre-pay a fixed-rate mortgage. Instead of looking into an interest only loan, take a look at some home warranty plans in your area. A home warranty plan can help you save money on repairs and replacements if you're looking for ways to reduce your monthly costs.
Jumbo vs Conforming Loans
A jumbo mortgage is any loan above $625,500, while a conforming mortgage is any loan below that.
A VA loan is only for those individuals who are actively serving in the military, veterans or some spouses. The Department of Veteran Affairs will back loans from banks or mortgage companies to provide housing for military personnel. These loans don't require a down payment and include negotiable interest rates.