Last week’s blog touched upon basics surrounding mortgages such as amortization, types of lenders, down payment and refinancing. This week, I will discuss the different types of loans for mortgages such as the FHA, USDA, and VA Loans, 15 versus 30 year loans, and lastly, I will go into detail surrounding various types of mortgage loans.
FHA, USDA and VA Loans:
If you are unable to come up with a 20% down payment, do not worry! There are a few options you can choose from in obtaining a residential mortgage loan.
The FHA (Federal Housing Administration) is a US Federal Housing Administration which allows a minimum down payment of only 3.5%, rather than 20% utilizing the conventional mortgage loan option. In a high cost area, the maximum 2021 FHA Limit on a single-family home is $822,375.
There are a few requirements to obtain an FHA Loan per the FHA website:
- FICO® score at least 580 = 3.5% down payment.
- FICO® score between 500 and 579 = 10% down payment.
- MIP (Mortgage Insurance Premium) is required.
- Debt-to-Income Ratio < 43%.
- The home must be the borrower’s primary residence.
- Borrower must have steady income and proof of employment.
Check out their website: https://www.fha.com/fha_loan_requirements:
The FHA Loan requirement #3, MIP (Mortgage Insurance Premium) or PMI (Private Mortgage Insurance) is required when your down payment is below 20%. Once you have reached an LTV (Loan to Value) of 80% meaning you own 20% of the home, the MIP or PMI will go away. The rationale behind MIP or PMI is to minimize the risk for lenders offering the mortgage loans. Until you reach this Loan to Value of 80%, you usually will need to pay around 1% per $100,000 borrowed. For example, if you borrowed $300,000, you would need to pay $3,000 annually or and additional $250/per month in PMI insurance.
There are many exceptions with MPI and PMI, such as good credit! Make sure you talk with your mortgage lender or look on the FHA website!
A USDA loan helps individuals looking to purchase a home in an eligible rural area. These loans are guaranteed by the United States Department of Agriculture (USDA). The USDA sites that a qualified “rural” area would be one which has a population under 35,000.
The USDA loan helps first time homebuyers who are unable to afford the traditional down payment required. Per the USDA website, the primary benefits of a USDA loan is:
- $0 down payment
- Competitive interest rates
- Low monthly mortgage insurance
- Flexible credit requirements
Please note, the USDA loans have income caps and normally are used by low and moderate income households. The current USDA income limits for a 1-4 member household is $90,300 and $119,200 for a 5-8 member household.
Check out their website to learn more: https://www.usdaloans.com/program/
The VA or U.S. Department of Veterans Affairs VA helps Servicemembers, Veterans, and eligible surviving spouses become homeowners. The VA Home Loans are provided by normal traditional large banks and small lenders. The VA guarantee a portion of the loan which helps the borrow obtain better terms and rates.
If you are eligible, check out the VA website for home loans! The VA loans often require little to no down payment or PMI (private mortgage insurance) which makes owning a home easy.
Check out their website: https://www.benefits.va.gov/homeloans/
15 year versus 30 year Mortgage:
Let us compare the two most popular types of mortgages: A 15 year versus the 30 year mortgage.
Why would you choose one over the other?
Well, partially it is your financial choice and preference.
Regarding the 15 year mortgage, you are paying higher payments per month, but your interest is usually lower than that of the 30 year mortgage. Additionally, with the 15 year mortgage, you are paying off the mortgage, well… 15 years sooner!
The 30 year mortgage is by far the most popular mortgage by both consumers and lenders. Payments are going to be much lower than the 15 year mortgage. The interest rates on the 30 year are still competitive to that of the 15 year but will be slightly higher.
Which should you choose?
This all depends on your financial situation and comfort. The additional cost on the 15 year mortgage can be stressful, especially while you are living on a budget. But you can save a significant portion of interest payments with the 15 year mortgage.
Mhm… that is tough! Here is what I recommend.
If you can handle the higher payments, choose the 15 year mortgage. If not, choose the 30 year mortgage, but here is the trick, add additional principal only payments to your mortgage each month. If your mortgage is $1,500 per month on the 30 year loan, add an additional $100. Even a small amount will save lots on interest and you will pay off your house sooner!
Types of Mortgage Loans:
There are a few types of mortgage loans. Normally you will hear about the conventional or fixed rate loan. There is also variable rate loans. In today’s interest rate environment, it makes more sense to lock in a low fixed rate loan. In this section, I will touch upon the jumbo, adjustable-rate and balloon loans.
What is a Jumbo loan?
A Jumbo loan is simply a loan where the value of the home exceeds certain limits set by the Federal Housing Finance Authority (FHFA). Simply put, jumbo loan are loans for more expensive houses – I am referring to mortgages in excess of $822,375 (please note this will depend on your county/area).
Check out the their website: https://www.fhfa.gov/DataTools/Downloads/Pages/Conforming-Loan-Limits.aspx
Conventional or Fixed Rate Loans:
I do not have a crystal ball or can see what interest rates will be in the future. I do know, in the current interest rate environment, a conventional or fixed rate loan would be the primary choice by most consumers. The fixed rate loan locks in the rate today, for the whole duration of your loan. For example, if you obtain a 30 year 3.10% loan, the interest rate would remain at 3.10% due the full loan.
Adjustable-Rate Mortgages (ARM):
An Adjustable-Rate Mortgage changes as the interest rate environment changes. If interest rates on a 30 year mortgage are at 5% and then they drop interest rates whereby your mortgage rate drops to 3%, you would now be paying a lower interest rate and overall lower monthly payment.
Unfortunately, the opposite is also true. If you obtained a 3% interest rate on a 30 year mortgage today, the interest rate could go up to 4%, 5%, 6% or even higher! If rates remain or go down, you can take advantage with an ARM. If rates go up, you end up having to pay even more for interest and total monthly payments on your mortgage.
AVOID The Balloon Mortgage:
A balloon mortgage is beneficial if you only want to live in your home for a few years and then sell. The balloon mortgage offers extremely low or no monthly payments. At the end of the term, which is normally 5-7 years (this can range depending on the lender), you would be required to pay the full balance in a lump sum.
WOAH… Talk about a lot!
While this can be utilized by some individuals, I express caution over this type of mortgage. The foreclosure rate on these mortgages can be extremely high. If the housing market remains or declines, you could result in little or negative home equity. Simply put, I do not recommend using the balloon mortgage for traditional home buyers – especially first time home buyers.
Your Home is AN ASSET:
Your home like most people, is your largest asset. Remember: Do not try and take short cuts. Make sure your monthly payments are within your budget. Slow and steady wins the race. One of the greatest forms of wealth creation is by owning a home. Add a few dollars extra to your mortgage (principle only), you will be surprised by the impact and how much faster you can pay it off! The faster you pay it off, the faster YOU own it!
Your financial future is up to you and only you. What are you going to do about yours?
Until next time,