Buying a home today can be a daunting task. There are so many choices to consider: condo, townhome, single family home, HOA, school districts, commute, the list goes on and on. Add to that the type of mortgage you should get and you may feel like quitting before you even get started. While I can’t help you decide on the type of home you should consider in a blog (I’m better at that in person), with the help of payoff.com I can help you learn the differences between the different types of mortgages to help you make an informed decision.
The Basic Types of Loans
1. CONVENTIONAL / FIXED RATE MORTGAGE
Conventional fixed rate loans are a safe bet because of their consistency — the monthly payments won’t change over the life of your loan. This is your standard, plain-vanilla mortgage.
They’re available in 10, 15, 20, 30, and 40-year terms but 15 and 30 are the most common.
2. INTEREST-ONLY MORTGAGE
Interest-only mortgages give you the option, during the first five or 10 years, to pay only the interest portion of your monthly payment instead of the full payment. You aren’t required do this. This slows down your repayment time but can be useful in a pinch. Afterward, the rest of the mortgage is paid off in full like a conventional mortgage.
3. ADJUSTABLE RATE MORTGAGE (ARM)
There are many different ARMs. The basic idea is that their interest rate changes over time throughout the life of the loan. The rate changes reflect changes in the economy and the cost of borrowing money. A common ARM is called the 5/1 loan — the interest rate stays the same for the first five years and then is free to change for the remaining 25 years.
Special Assistance for Certain Groups
4. FHA LOANS
These are mortgages guaranteed by the Federal Housing Administration. They come with built-in mortgage insurance to protect against the possibility of not being able to repay the loan. The required down payments are smaller with these loans.
5. VA LOANS
These loans make it easier for veterans of the U.S. armed forces, and sometimes their spouses, to buy homes. They don’t require a down payment and are guaranteed by the Department of Veteran Affairs.
More Exotic Types of Loans
6. COMBO / PIGGYBACK
The combo occurs when you put a down payment of less than 20% and take two loans of any type in combination to avoid paying Private Mortgage Insurance.
On a balloon mortgage, you pay interest only for a certain period of time — five years for example — and then the total principal amount is due after this initial period.
Jumbo refers to a mortgage that’s too big for the Federal Government to purchase or guarantee. Currently, the limit is about $700,000. This means that the borrower wouldn’t get the lowest interest rates available on smaller loans.
Now that you have a basic idea of what kind of mortgages are available, you are in a better place to work with your mortgage broker in finding the best type of loan for you. Once you are pre-approved you can begin shopping for your new home with confidence and excitement.
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Buying your first home is an exciting milestone. Buying a home is a multi-step process. The most important step is to insure that your credit score is as high as possible. Your FICO credit score is a three digit number ranging from 300-850. The higher the score, the better interest rate which equates to a lower payment. For a small fee, your credit score is available through myfico.com If your credit is less than stellar there are things you can do to improve it before meeting with a mortgage lender.
- The first step in managing your credit is to familiarize yourself with the credit reports. There are three credit bureaus: Equifax, TransUnion, and Experian. Each bureau will allow you to review your credit report for free once a year. When you are planning on purchasing a home, it is in your best interest to download or print your report from each bureau. If you want to make sure everything is accurate with no intention of buying for a few months or a year, then you should pull your report from a different bureau every few months.
- Once you have reviewed your credit report(s), dispute any incorrect information. Most people find a few discrepancies. It may be as simple as a misspelled name or an account number that has been transposed by mistake. Other discrepancies could be more damaging such as an account or purchase that you never authorized. This could indicate identity theft and should be addressed immediately. Any error could cause your credit score to be many points lower. Using a service like Credit Karma will allow you to review your credit reports, learn your FICO score, and allow you to dispute any discrepancies electronically.
- After you have reviewed your credit reports and reported any inaccuracies, you can begin to build your credit up and improve your score. First and foremost try to pay down or pay off new or high interest credit cards. It can be hard to pay extra on accounts especially when you are short on cash. My best advice is to follow a strict budget, cancel any memberships that aren’t being used or you can go without for a while, and sell items to bring in extra income. The ratio of the balance on your credit cards compared to the credit limit is called your credit utilization ratio. If you have a $1000 limit on a card with a $600 balance, your credit utilization ratio is 60%, which is considered very high. You want to pay down the balances on all of your cards as low as possible. The lower the balances, the higher your credit score will be.
- From this point on make sure you pay every bill on time every month. Even one late/missed payment one month can hinder your credit score.
- Now that you have increased your credit score and cleaned up your credit reports, it is time to meet with a mortgage lender to get pre-approved and start house shopping. The mortgage lender will pull credit reports, verify your income, bank documents and tax filings. We can recommend local lenders that are knowledgeable and can work with individuals with lower credit scores, as well as offer special programs for teachers, police officers, and veterans.
- One last and extremely important tip: Once you have your pre-approval and until you have closed on your new house, do not open any new accounts or make any large purchases. This can hinder the mortgage process and cause you to lose your dream home.
When you are ready to purchase your home, or if you have any questions regarding the home buying process, please give me a call at 970.393.3424 or sign in to my website.
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