It’s time for you to get a mortgage for that home you’ve been wanting in Phoenix. You walk into a branch, sit down to talk with someone, and they ask, “What type of mortgage are you looking for?” At that point, your mind goes blank and all you can think is, “Uh… a regular one?”
What most people don’t know is that there are many different types of loans you can obtain on your house, depending on what you’re looking for and can afford.
Here’s what you need to know to help you make a decision about which mortgage product might be right for you.
- Low-down payment mortgages
These include first-time home buyer programs, FHA loans and conventional mortgages where you don’t put 20% down. These loans are designed to make it easier to get into a house (because saving for a down payment is increasingly difficult with all of our student loan debt). The caveat is that you have less equity in your home making it easier to be underwater (owe more than your home is worth) if home values drop.
These loans almost always require mortgage insurance (PMI) added to the loan, which includes an up-front premium when you close on the loan and annual payments. The current up-front premium for an FHA loan is 1.75% of the loan amount, or $3,500 on a $200,000 loan, and if you put down less than 5% on the same loan, you’ll be paying 0.55% of the loan balance every year ($1,100 on the first year).
You can only avoid mortgage insurance premiums by having a down payment that is at least 20% on the loan. If you don’t have this saved up, look into first-time buyer grants funded by the county, state and city you live in. Many of these don’t have to be paid back.
- Conventional Mortgages
Typically require a 20% down payment – that means you, the buyer, will have to pay for 20% of the purchase price out of pocket, in addition to any closing costs. The most common term (length of loan) for a conventional mortgage is 30 years, followed by 15 years and 20 years.
Now, if you have the option to stretch out the payments for longer, why wouldn’t you take the lower monthly payment? For starters, a 15-year mortgage typically has a lower interest rate than a 30-year mortgage. Even if the rates were the same, the shorter mortgage term means you’ll pay less interest over the life of the loan.
- Adjustable Rate Mortgages(ARM)
Can help you increase your purchasing power because of their low introductory payments and interest rates. These loans typically have a fixed rate for a period of time. Once that timeframe passes, the rate will adjust based on the market. ARMs include rate caps, which can limit how much your interest rate can rise.
For example, with a 5/1 ARM, your rate is the same for the first five years. After five years, your payment adjusts to the new market rate.
Now that you know a little bit more about your loan options, remember to get pre-approved for your mortgage before you start shopping!