Purchasing your first home in the west metro means navigating some unfamiliar waters. This can seem particularly daunting when it comes to financing. As the acronyms begin to fly in the mortgage process it can be challenging to understand the various options available and more importantly their impact to you.
Entering the process with a basic understanding of both the type and structure of loan options can help greatly.
Loan Type- Conventional vs FHA vs VA
| Type | Pros | Cons |
|---|---|---|
|
Conventional Mortgage Borrower needs · At least a 5% down payment · Solid credit rating & debt to equity ratio · Private Mortgage Insurance if financing over 80% of purchase price |
Typically a better rate than insured mortgages Reduced fees |
Credit score requirements more stringent Usually require a 5% down payment |
FHA Loan Lender is insured by the Federal Housing Administration, so loans include less stringent financial requirements but additional fees and the potential for less favorable rates Borrower needs · At least a 3.5% down payment · Decent credit rating & debt to equity ratio · Private Mortgage Insurance if financing over 80% of purchase price |
Lessor restriction on qualifications including debt to equity ratio and credit score Reduced down payment requirement May be only option for some borrowers |
Borrower pays a premium at closing of 1.75% An additional annual premium is rolled into your loan |
| Veteran’s Administration (VA) Loan
Home loans for service members, their spouses and widows or widowers. Loans require no down payment but come with additional fees and the potential for less favorable rates Borrower needs · Veteran status · Decent credit rating & debt to equity ratio · Private Mortgage Insurance if financing over 80% of purchase price |
Additional fees may be financed or paid by seller |
Borrower pays an upfront loan fee of 1.25% - 3.3% of loan amount Limits to the size of the loans will vary by county |
Loan Structure- Fixed vs Adjustable
In addition to the type of mortgages discusses above, there are options related to the rate structure of your mortgage.
While there are many different types of products, the biggest variable here involves how interest will be charged. This can either be a fixed number or one that can adjust over time.
| Type | Pros | Cons |
|---|---|---|
|
Fixed Rate Mortgage The interest rate charged is a fixed number throughout the term of the loan. These mortgages are always popular, but even more so in a low interest rate environment |
Stability helps you to budget accordingly Easy to understand |
If rates fall, mortgage owner must refinance to capitalize, this may mean closing costs and other fees |
|
Adjustable Rate Mortgage The interest rate begins lower than a fixed rate mortgage but can change during the term of the loan based on set criteria. A 5/1 loan is fixed for the first 5 years and can adjust each (1) year after that. Rate changes are typically based on prevailing interest rates. Caps and contingencies exist |
Lower initial rate and payment can help borrowers afford a more costly home Can offer short term buyers more flexibility in payments Ability to capitalize on falling rates without refinancing |
If prevailing rates rise, so does the interest payment on your loan Terms of loan can mean a significant interest adjustment in the loan Features and structure can be difficult to understand and may make it hard to compare mutliple lenders |
The type and structure of your mortgage loan are both important to understand, but only represent a small portion of home financing considerations. The best way to consider your options and which may be right for you is to sit down with a knowledgeable resource and begin with a goals-based consultation. You will leave that discussion with an idea of the payment you can manage and how that may contribute to your housing budget and drive your search.
At Zachary Adams and Associates we have taken hundreds of families through this process and helped demystified all aspects of home buying. If you are ready to marry your wish list with our wisdom, we’d love to hear from you.
Contact us today to get started.