Whether it’s your very first home, or you’re moving for the third time in your life, moving house is always an exciting process. Amongst all of the giddiness though, there is usually a lot of stress involved. We all know that mortgages aren’t cheap, and that if we want to be able to cope with the monthly payments, we have to choose the right one for our needs and lifestyle. In 2017, homebuyers are left with a very difficult decision, as there are numerous types of mortgage loans on the market, all offering something unique but useful. If you’re amongst the thousands who are struggling to make a final decision, hopefully this in depth guide will help you to identify the right mortgage loan for you.
All loan types fit into categories and overall, it kind of looks like an ancestry tree – at the top you have a fixed-rate or adjustable-rate loan. As a borrower, it’s inevitable that you’ll come across these two types of loan, and you’ll have to pick one before you carry on with the home buying process. For a fixed-rate mortgage loan, you will receive the same interest rate throughout the entire payment process, meaning that your monthly payment will never fluctuate, allowing you to budget for all other expenses easier. Some people often get confused about whether this applies for long-term financing options, and the great answer is that it does, even for a 30-year fixed rate mortgage loan! Although, whilst having a fixed rate loan allows you to budget your finances easier, this novelty does come with a cost of higher interest charges overall compared to the initial rate of an adjustable-rate loan.
Of course, as a FRM loan and an ARM loan are opposites, you can already guess what’s involved with an ARM loan. As you’d expect, adjustable-rate loans have an interest rate that fluctuates over time, either increasing or decreasing. Usually, the interest rate on an ARM loan will change on an annual basis after an initial period of remaining fixed, which is why it’s often referred to as a “hybrid” product. For a hybrid ARM loan, the interest rate begins fixed and unchanging before then switching to an adjustable rate. To put this into perspective for you, the 5/1 ARM loan has a fixed interest rate for the first 5 years, which then transforms to an annual adjustment after that duration. The ARM seems favourable to many as the interest rate will always begin lower than for an FRM loan, however later adjustments do provide home-owners with uncertainty.
So, once you’ve made the decision of either fixed or adjustable, you’ll need to consider either government-insured or conventional. If you’re wondering about a conventional loan, the main thing you need to know is that it isn’t insured or guaranteed by federal government. Of course, the core benefit of this mortgage loan is the fact that you can completely evade mortgage insurance. As long as you make a payment of 20% or more, mortgage insurance won’t be an issue for you. However, pay under 20%, and you’ll be approached by PMI, increasing the value of your monthly payment, although the cost of PMI is usually much less than the insurance attached to government-insured loans, such as a FHA. These are all things you need to consider before making this choice.
There are three main government-insured loans that you’ll need to consider, which are FHA, VA and USDA. Naturally, all three will offer different qualities when it comes to your mortgage payments, so listen carefully about what each one has to offer before choosing one.