Finding financing for a home can be stressful and confusing. You have so many questions and you're not sure where to turn. We've compiled a list of common types of mortgages and a few tips for how to make your new home buy easier and enjoyable!
There Are So Many Mortgage Options. How Do I Know Which One to Choose?
We understand and you are right! There are a lot of different mortgage options and lenders to choose from. There are 8 major types of mortgages:
30-Year Fixed-Rate Mortgage. This is typically 30-year loan with an interest rate that will stay the same the length of the mortgage term. 30-year fixed-rate mortgages offer lower monthly payments, and you an assured your interest rate will never change.
15 Year-Fixed Rate Mortgage. Just like a 30-year fixed rate, your interest rate remains the same. With a 15-year fixed-rate mortgage, you'll have your home paid off in 15 years and you enjoy lower interest rates. The downside: your monthly payment will be higher.
FHA Mortgage. FHA mortgage loans are backed by the government and insured by the Federal Housing Administration. FHA loans are great options if you have minimal income and/or lower credit scores. FHA loans do not require 20% down payment, but you will need to pay your mortgage insurance premiums out of pocket.
VA Mortgage. VA loans are available to military service members and veterans, and are backed by the Department of Veterans Affairs. VA mortgage loans don't require a down payment or mortgage insurance, but there is a VA funding fee that is required to be paid upfront. Lillian Custom Homes offers service members and veterans special incentives and discounts, so the savings and benefits truly add up.
USDA Mortgage. USDA mortgage loans are backed by the U.S. Department of Agriculture, and are designed for homebuyers living in some rural or suburban areas. Not all rural and suburban areas are USDA-eligible, and there are income and property value maximums that apply. If you qualify, USDA mortgage loans may not require a down payment and you have access to options like home improvement loans and grants.
Interest-Only Mortgage. With an interest-only mortgage, you pay only the lender's interest charges. This type of mortgage is good if you don't plan to stay in your home long, or you are confident in your ability to make periodic payments on the principal. To qualify for an interest-only mortgage, lenders will need to see that you have a substantial assets.
Adjustable Rate Mortgage. Unlike a 30-year or 15-year fixed rate mortgage, an adjustable rate mortgage has a fixed interest rate for a period of time, then adjusts periodically. Adjustable rate mortgage loans are another great option if you don't plan to stay in your home long. The initial fixed rate tends to be lower than other loan options, but you have to lock in that low rate for a 1, 5, 7, or 10-year term.
Jumbo Mortgage. A jumbo mortgage loan is for homebuyers looking at higher-value homes. The Federal Housing Finance Agency announced that for 2020, $510,400 is the conforming loan limit. Any home over this value qualify for a jumbo mortgage loan. This mortgage loan requires a FICO score of 700 or higher and at minimum 10% down payment.
Home Buying Tips
Save now for your down payment. It is never to early to start saving. In fact, the earlier the better. It's common to put down 20% of the home purchase price. Some lenders will let you put down less. Fannie Mae offers a HomeReady® Mortgage Program that is ideal for first-time home buyers, with down payments as low as 3% . But even a small down payment can mean a lot of money out-of-pocket. For example, a 3% down payment on a $300,000 home is $9,000.
Determine how much you afford, set your budget and stick to it. We know...you are excited to start looking at beautiful pictures and taking tours, but before you start, you have to know how much house you can afford. There are several home affordability calculators to help you determine what your price range should be. Once you know how much you can afford, set your budget and stick to it. If you have a pre-approved amount, look at homes that cost less than that. This will give you wiggle room bidding and making competitive offers.
Make sure you budget for closing costs. When saving for your down payment, set aside funds to cover your closing costs as well. These costs are required to close your mortgage, and they can be significant. Closing costs are typically between 2% - 5% of your loan amount. Home builders may offer limited time promotions where they will pay your closing costs. That may be the optimal time to buy and could save you thousands.