Mortgage Financing

Fixed-Rate Mortgages

For decades, the 30-year, fixed-rate loan was a universal solution to every borrower's financing needs. Although we have seen the growth of many other options, this choice still remains the most popular.

Why? Predictability. Over the life of the loan, as you pay back your loan, your monthly payments, which consist of principal and interest, do not change. Added in to this monthly payment will be a charge for local property taxes, your homeowner's insurance premium, and, if applicable, private mortgage insurance (PMI). As your insurance premium goes up and your property taxes are increased, your lender will also adjust your monthly payment. So, your payment will change, but it won't be because of your mortgage. That piece will remain constant. Fixed-rate mortgages come in several varieties.

Conventional Mortgages

The conventional mortgage is the most common. You take out a conventional fixed-rate mortgage at your lender for a 30-year, 20-year, or 15-year term. Needless to say, the shorter the period of payback, the larger the monthly payment. However, since you will be paying for a shorter period of time, and because the interest rate on these loans is generally lower, the shortest mortgage is also the cheapest.

Shorter Term Means Cheaper Mortgage

Although a 15-year mortgage will cost you more monthly, you will save a considerable sum of money if you intend on staying in the home long-term.

 

15 Year

30 Year

Savings

Loan Amount

$150,000

$150,000

 

Interest Rate

4.0%

4.5%

 

Payments

180

360

 

Monthly Payment

$1,110

$760

 

Total Interest Expense

$50,400

$123,600

$73,200

Other Types of Fixed-Rate Mortgages

VA (Veteran's Affairs) Mortgages

Within this classification, you may qualify for a sponsored mortgage. If you're a veteran, you may want to look into a VA mortgage. Under this program, the Department of Veteran's Affairs guarantees repayment on these loans to the lender who produces the loan. As a result, you may borrow up to a certain amount, often with a small (between 3% and 5%) down payment. Interest rates are slightly below those for non-VA sponsored conventional mortgages. In addition, no private mortgage insurance is required with a VA mortgage.

SUGGESTION: The term "veteran," for purposes of VA loan qualification, also includes members of the National Guard, military reservists with six or more years of service, and some widows of veterans.

FHA Mortgages

If you don't qualify as a veteran, almost anyone can apply, regardless of income, for a FHA mortgage. These are insured loans, available through banks and other lenders. The maximum loan amount is set by the FHA. Remember those nasty debt ratios we discussed earlier? For FHA loans, lenders relax those requirements so that all your debt cannot exceed 43% of your gross income. This means that a lender will qualify you for a mortgage with FHA sponsorship that you would not have qualified for otherwise. To apply, inform your lender that you will want FHA insurance. Many lenders are authorized to approve an application without submission of any paperwork to FHA. These lenders are called Direct Endorsement Lenders. If you can, try to use one, since your application time should be quicker. In any case, the process will be handled by the lender, and you, as the borrower, will never have to deal with FHA directly.

IMPORTANT NOTE: A large disadvantage to FHA and VA mortgages is that much paperwork is required and the approval process is very slow. As a result, many lenders are reluctant to issue them, and sellers are often unwilling to wait the extra time that processing these applicants requires. FHA loans for 2019 require a FICO score of 500 or better with a down payment of 10%. For FICO score of 580 or better, a down payment of 3.5% is required.

Let's take a quick look at some other types of mortgages and how they work:

  • Bi-weekly mortgage. Payments are set up as if the loan was for 30 years, for example, but instead of paying once a month, you pay one-half of the normal payment every 2 weeks. Result: You save a bundle in interest expense.
  • Balloon mortgage. Monthly payments based on fixed interest rate, but payments made cover interest only, with the entire principal due at end of term, usually a short period. Provides lower payments, but risky if rates climb.
  • Jumbo mortgage. A standard mortgage, except that the loan principal exceeds a nationally set lending limit. Rates and terms on these loans are typically less favorable than standard mortgages.
  • Buy-down. Typically a developer or builder will offer an interest subsidy on the buyer's loan which lowers monthly payments during the first few years of the loan. Can be fixed or an ARM. Provided as an incentive to help sell slow-moving property.
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