Which Mortgage Loan Is Right for You?

Which Mortgage Loan Is Right for You?

Buying a home can be very exciting, whether you are a first-time homebuyer or a seasoned buyer. And while it’s true that going through the mortgage process can be a bit complex, building your knowledge prior to application will give you a solid foundation to lean on. This article, as well as these additional online resources, may help.

As you explore your financing options, you are likely to find that there are a variety of mortgage loans available. Each type is designed to meet the needs, circumstances and preferences of certain borrowers. To determine which type of loan may be right for you, learn about the features each one offers, and compare those against your goals and financial situation. You may also want to speak with a mortgage expert, who can provide more information and insight.

The most common types of mortgage loans are conventional, Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) loans. We explain each of these below.

Conventional mortgage loans

Most mortgage loans fall under the “conventional loan” category, originated and serviced by private mortgage lenders, such as banks and credit unions. Conventional loans can be structured as fixed-rate or adjustable-rate mortgages, giving borrowers flexibility in repayment terms. A construction mortgage loan for building or renovating a home is also a conventional loan.

Fixed-rate mortgage loans

A fixed-rate mortgage is a home loan whose interest rate remains the same throughout the duration of the loan term. The borrower can typically choose from a variety of term options — often 15, 20 or 30 years.

Those who choose a fixed-rate mortgage often do so to protect themselves from the possibility of rising interest rates and to lock in predictable monthly payments. Household budgeting can be easier when you know your mortgage payment won’t fluctuate with changing interest rates; with a fixed-rate mortgage, you can count on it to be the same every month.

Adjustable-rate mortgage loans

Conversely, the interest rate of an adjustable-rate mortgage (ARM) can fluctuate over the loan term based on market conditions. Borrowers sometimes choose an adjustable-rate loan when interest rates are relatively high, and they expect them to decrease over time.

ARMs are typically structured to include an introductory period — often three, five, seven or 10 years — when the interest rate remains fixed, typically at a rate that is lower than that of a comparable fixed-rate loan. Once this introductory period ends, the interest rate may be adjusted by the lender every six months or year, depending on the terms of the loan. Rate adjustments are calculated based on a benchmark index and a margin set by the lender.

For this reason, ARMs come with some level of risk: If interest rates rise during the term of the loan, the borrower’s monthly payment amounts are likely to rise as well. These increases may result in a higher total cost paid for the home as compared with the cost had the borrower chosen a fixed-rate loan. Some borrowers choose to avoid this risk by selling their home and/or paying off their adjustable-rate mortgage within the introductory period (before the loan becomes subject to rate adjustments).

In a more positive scenario, interest rates would decrease after the introductory period and monthly payments would likely come down. In this case, the total cost of buying the home could end up being less than if the borrower had chosen a fixed-rate loan. The challenge is that there is no surefire way to predict which way rates will move or how their ups and downs over time may affect the ultimate cost of purchasing the home.

Construction mortgage loans

If you are building or renovating a home, a construction mortgage loan may be a financing option for you. This type of loan, which may have an adjustable or a fixed rate, differs from other types of mortgages in that it typically allows the borrower to make interest-only payments during the construction or renovation period. Once that phase has been completed, the loan can be converted to a permanent mortgage (called a “construction-to-permanent loan”).

The down payment requirement for a construction loan is as low as 5% and if you own your land, you can use that as part of the equity required. A Renovation Construction mortgage allows you to use the future value of your home — after improvements — enabling access to sufficient funds for the total renovation costs. Lenders recognize that flexibility is key in financing construction projects, so if you are exploring this type of loan, be sure to ask your mortgage lender how it might be customized to best serve your needs.

FHA loans

An FHA loan is type of mortgage that’s insured by the Federal Housing Administration designed to make homeownership more accessible, especially for first-time buyers and those who might not have funds for a large down payment. The credit requirements are more flexible for an FHA loan, so qualifying is easier compared to many conventional loans and buyers have the flexibility of choosing a fixed- or adjustable-rate loan.

VA loans

U.S. military members and veterans, and their eligible surviving spouses who are buying a primary residence may be able to secure a VA mortgage loan. The benefits of this type of loan can be numerous. For example, they may provide up to 100% financing, meaning no down payment is required. Interest rates may be lower than those of conventional and FHA loans, so the borrower may have lower monthly payments and pay less for their home than they might have through another type of loan. And closing costs are limited and can usually be added to the loan amount versus being paid upfront.

If you’d like to discuss loan options and requirements in more detail, contact a Dollar Bank mortgage expert, email reslendingadmin@dollarbank.com or call us at 1-800-344-5626.
 

This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.