Know Your Options Before Getting a Mortgage

I’m not sure I’ll even buy a house again, but I well-remember the process. Getting a mortgage can be excruciating. Here are some of the options you need to be aware of before you take the plunge.

Before securing a home it’s important to understand all the different types of mortgages offered by lenders. You should also be aware of the qualifications, and the pros and cons of each one.

All mortgages share the same principal function of borrowing money so you can afford a house that costs hundreds of thousands of dollars. Then, of course, comes the part where you repay the loan with interest. Even with these similarities, mortgages have various differences that set them apart. Here are some of the common types of mortgage available:

Government Guaranteed Loans

There are three main types of loans guaranteed by the federal?government, including a VA, an FHA and USDA/RHS loans. Realize that the government doesn’t actually lend you the money. Instead, you work with an approved lender. The government guarantees the loan. When I bought, I used the FHA loan. Because the government guarantees the loan, it’s much easier to acquire. Getting a mortgage is easier, even when you have some credit and income blips if the government promises to back you.

A VA loan is only available to active or retired military servicemen and women and their families. The advantage of this type of mortgage is that there is no down payment required. This is often the hardest part of the home buying process. Additionally, there are limited closing costs, no monthly PMI insurance, and access to the lowest interest rates.

An FHA loan is available to first-time homeowners and anyone else who is having trouble coming up with 20 percent for the down payment. This type of loan only requires a downpayment of 3.5%. Plus, unlike a traditional loan, you can have less than perfect credit. ?The drawback to an FHA loan is that you are only eligible if you will use the home as your primary residence. On top of that, you will be required to pay mortgage insurance.

A USDA/RHS loan is provided by the United States Department of Agriculture for borrowers looking for a home in a rural location. There are caps as to the amount you can make based on the area in which you live. However, you can finance 100% of the loan.

Standard Fixed or Adjustable Rate Mortgage

The most common mortgages are the fixed or adjustable rate offered by a bank. Since they are not backed by the government, the prequalifications are more stringent, with very little wiggle room.

In most cases, the mortgage company will acquire a credit report and then require bank statements and W-2s. The amount you can borrow depends on your earnings and your debt-to-income ratio, as well as your credit score. Most banks also prefer that you have at least 5% to 10% to put as a down payment. However, if you have less 20% down, banks will add private mortgage insurance (PMI) to your monthly payment until you reach a certain loan-to-value ratio.

The advantage of a fixed rate mortgage is that you have the same monthly payment amounts from the first payment to the last. While this may be a little harder initially, as your income grows it gets easier to afford.

With an adjustable rate mortgage, you have the advantage of a low introductory monthly payment for anywhere from a couple of years up to five or seven years. For someone with a family or anyone who used all their resources to acquire the home, it makes the first few years easier. The disadvantage is that after the initial period your payments can soar depending on the going interest rates. However, if this happens you might be able to refinance again to either a fixed rate or an adjustable rate with another lender.

Many lenders cap the interest rate. So, when getting a mortgage, check to see if the variable rate has a cap on it.

Length of the Mortgage

While most people take out a mortgage for 30 years, you do have other options. You can secure a mortgage for 10, 15, 20, or 25 years. The advantage to straying away from the traditional path is that while your payment may be a little bit more each month, you will pay it off faster and pay less interest in the process. This allows you to enjoy greater savings, in significant numbers, and ultimately pay a lot less when you finish with your payments.

There are also 40-year mortgages. However, be wary of these. Getting a mortgage with that term length can cost you tens of thousands of dollars more in interest, even though the monthly payments are more manageable.

Bottom Line ? Getting a Mortgage

Whether you serve in the military, are single, or raising a large family, there is a mortgage that’s just right for you.

With all the options available it can become confusing, though. If you are not sure which one is the best choice for you, you may want to work with a mortgage broker and let them explain the options you have and which ones are the most beneficial for your situation.

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