Home mortgages come in a variety of shapes, sizes and colors; enough to suit the needs of virtually any consumer who is credit qualified. However, mortgages are a “one size fits all” idea, they are more of a “tailored to fit” suit, and before a customer signs on the dotted line, they need to know the facts about each.
Some standards exist as a subset in any type of loan. They are as follows:
Permanent rate buy down: by putting down $1,000, a buyer can reduce the interest rate offered to them by one quarter of a point. For example, if a buyer offered a 5 percent interest rate, he can reduce this by paying an additional $1,000 at closing to 4.75 percent. Subsequently, if a buyer puts down $4,000 more at closing, the interest rate dips to 4 percent.
Temporary rate buy down: These are less expensive than a permanent rate buy down but will only last for one to three years. After that point, the rate will increase to the maximum market rate offered at the time. For example, if a buyer has a temporary buy down of a loan from 5 to 4.5 percent for one year, the interest rate for the first year of the loan will be 4.5 percent. After that, the rate increases to 5 percent for the duration of the loan, but will never exceed 5 percent.
The most notable thing to know about FHA loans is that they are government insured. Government insurance does not mean added protection for the consumer. What it means is that the government has a stake in the loan and can repossess the house if the owner fails to make his payments. The Department of Housing and Urban Development (HUD) protects the interest of the lender in the event that the buyer defaults, not the interest of the borrower. However, this insurance gives banks the flexibility to provide favorable loan terms.
FHA loans come 2 flavors a 203B loan and a 203K loan. The difference between the two is that the 401B loan is for a standard purchase and the 401K loan is designed for a purchase and secondary funding amount on the back end for remodeling or repairs—best suited for foreclosure properties.
FHA loans have a traditionally low down payment percentage, current sitting at 3.5 percent of the purchase price. The down payment is due at closing, along with approximately 4 to 5 percent for taxes, insurance premiums and closing costs.
In addition, FHA loans come with a 2.25 percent of the purchase price PMI (Private mortgage insurance premium) payable upfront to protect the lender against default, and monthly payments of 0.5% of the sales price due over the duration of the loan. The PMI is the lender’s compromise in exchange for the low down payment, using the PMI to make up for the less than 20 percent down other loans require.
Interest rates for FHA loans are not determined by credit, but by current market rates.
Only eligible active duty, honorably discharged or retired veterans can qualify for a VA loan. These are particularly attractive loans, insured by the Department of Veteran’s affairs offering no down payment, low closing costs and no mortgage insurance premium. However, vets applying for a VA loan have a 2.25 percent funding fee at closing unless they are over 20 percent disabled.
The interest rates for VA loans are usually one quarter of a percentage point lower than market rates.
Conventional Loans Now we delve into higher down payments ranging from 10 to 20 percent, exceptional interest rates and no PMI for buyers putting 20 percent down on the home. Conventional loans are structured for those buyers with excellent credit, and credit scores over 700. With a conventional loan, the better your credit score, the lower your rate; the more your down payment, the less chance you hold to pay PMI.
When it comes to deciding on a loan product, consumers should consider different options and decide on a mortgage product that fits a budget and a life. The best advice is to get three side-by-side comparisons of different loan scenarios and make a decision based on the cost of the loan over its lifespan or amortized cost. Selecting a loan in this way will never steer you wrong.