Different Mortgage Strategies
When it comes to paying for a home, buyers today have numerous financing options. This is a summary of the primary alternatives. I can provide you with information about rates and programs that are available. Interest rates are for illustration only.
Conventional Mortgage. A conventional loan is a mortgage made between a lender and a borrower with no other parties involved (such as VA or FHA). Conventional loans customarily require a 20% down payment. Down payments may be as low as 5% with mortgage insurance.
Example: A buyer purchases a $400,000 home. The lender requires a 20% down payment ($80,000). At 7% the $320,000 balance has a monthly P&I payment of $2,391 over 30 years. Mortgage insurance could lower the down payment requirement to 5%, or $20,000, which increases the monthly payment.
Advantage: Conventional mortgages are straightforward and easy to understand. Conventional loans offer the largest variety of financing options.
Fixed Rate conventional loans feature equal monthly payments that are made over the term of the mortgage. The standard time period is 30 years or less. The interest rate remains the same which keeps the principal and interest payments the same over the term. Payments can vary if taxes or insurance escrow payments change.
Adjustable Rate loans are mortgages that allow for payments which change periodically over the life or term of the mortgage. An ARM loan has a set interest rate and payment for a period of time and then adjusts to the market rate at a predetermined point. ARM loans feature lower rates over the initial loan period.
VA Loan. The letters ‘VA’ stand for Veteran’s Administration – a branch of the US government. VA is not a lender but rather guarantees mortgages for lenders to help eligible veterans. VA loans require no down payment up to the VA maximum loan limit. VA loans can be assumed by qualified borrowers.
Example: A veteran purchases a $235,000 home. With no down payment the loan amount is $240,050 including the VA Funding Fee, for a first time veteran’s purchase. At 6% interest over 30 years the monthly P&I payment is $1,439.
Advantage: VA requires no down payment. The seller can (but is not required to) pay all closing costs for a veteran.
FHA Loan. FHA is the Federal Housing Administration, a division of the US Department of Housing and Urban Development. FHA does not lend money; instead, like VA, it insures mortgages allowing lenders to make loans that might not be eligible for conventional financing. Down payments are as low as 3.5%*. Both fixed-rate and ARM mortgages are available. FHA loans are assumable by qualified borrowers. FHA mortgages have credit standards and other rules that are more flexible than typical conventional mortgages.
Example: A buyer of a $200,000 home makes a down payment of $7,000. The loan amount including up-front MIP would be $199,755. At 6% interest over 30 years the monthly P&I payment is $1,198.
Advantage: FHA offers a low down payment.
The actual terms of any financing are subject to the requirements of each individual case. Choosing the “best” mortgage depends upon the circumstances of the individual borrower. I will be happy to refer you to a loan officer to explain the options available to each buyer for mortgage financing.