Are you buying a home for cash? Meaning no mortgage? If yes, you are unusual indeed. Most buyers need a mortgage in order to buy property. If you do need a mortgage, it’s always good to know some of the basics.
The most critical decision you will have to make is what type of mortgage is best for you. If you end up with anything other than a 30-year fixed rate mortgage, you would be unusual again. Most homeowners do have a 30 year fixed mortgage. Not necessarily because it was the BEST option, but because it may have been presented as the only option.
AND, buyers seeking a mortgage have heard all about 30-year fixed. That’s what your friends have, it’s all over the news, and mortgage companies advertise it a lot. But many buyers still do not need a 30-year fixed mortgage.
Here are 7 Most Commonly Used Mortgages and the Buyers They Fit:
- 30-Year, fixed rate Benefits: Best for buyers who want the security of a fixed interest rate payment and plan to stay in the home for a long time. Drawbacks: Generally speaking, the 30-year fixed rate has the highest interest rate of all options. The 40-Year rate would be higher.
- 15-Year fixed rate Benefits: Since the loan is paid back over half the period of time (compared to the 30-year), the 15-year loan appeals to those who can afford higher payments, want to build equity quickly, want to pay less interest. Payments for principal and interest remain the same over the life of the loan. Drawbacks: Monthly payments are higher. Much more likely to cause financial strain during economic setbacks.
- 40-Year mortgage Benefits: Best for buyers who want the security of a fixed interest rate payment, plan to stay in the home for a long time, AND need a lower payment than the 30-year fixed payment. Drawbacks: Higher fixed rate. Will take longer to pay down principal balance.
- Adjustable rate mortgage Benefits: Lower interest rate in the early years of the loan. Good for those who know their income will rise over the coming years and/or those who feel they will be moving in a few years and aren’t concerned with a rate increase. Also good for buyers who want to qualify for a higher loan amount. Drawbacks: Interest rates and monthly payments can increase significantly. However, most adjustable rate mortgages have a cap such that the rate can’t surpass specified parameters established when the original loan is closed. Refinancing is always an option to get out of an adjustable program.
- Interest only mortgage Benefits: Best for those who need/want the lowest possible rate/payment. With this mortgage, no payments toward principal are required. Buyer only pays the interest due on the loan each month. However, voluntary payments toward principal can be made at any time. Drawbacks: Homeowner is not paying down the principal on the loan. Unless the property value is increasing, the homeowner will not gain equity in the home. Refinancing to a different type mortgage is an option down the road.
- FHA Mortgage Benefits: Lower downpayment requirements than conventional loans. Often easier to get qualified if income is lower or credit is less than perfect. Under the FHA umbrella, there are several program options: 30-year fixed, 15-year fixed, buydowns and adjustable rate mortgages. Drawbacks: Most buyers will pay mortgage insurance.
- VA (Veteran’s Administration) Mortgage Benefits: Lower downpayment requirements than conventional loans. Often easier to get qualified if income is lower or credit is less than perfect. Under the VA umbrella, there are several program options: 30-year fixed, 15-year fixed, buydowns and adjustable rate mortgages. VA mortgages have no mortgage insurance. Drawbacks: Must be a Veteran to qualify – with a few exceptions for some spouses and ex-spouses. VA does have a required funding fee for all borrowers who are not disabled.
These are the most often used mortgage programs. There are others available. If you want to purchase a home and want to pursue other options, give me a call. Always know your options before you search for a property.
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{ 4 comments… read them below or add one }
Are all these choices available for a refinance too? can someone refinance to get a mortgage with the interest only?
Ty, yes, borrowers CAN refinance with an interest only mortgage. For the absolute lowest monthly payment, there is also an interest only adjustable rate mortgage. With this product, the interest rate is guaranteed to stay the same for the intial years of the loan – could be as short as 3 years or as high as 7 years. For homeowners wanting the lowest payment, this is a valuable option. Those with interest only loans are free to increase their payments to pay down principal.
we were only told about a 30 year mortgage. if we could have done something different with lower payment, it would have been much better for us
@kp. Sounds like you are in the midst of selling/buying. It’s not too late to change your mortgage to a different program. Talk to your mortgage professional about it.