Let’s talk about mortgages since most buyers need one. There are a lot of options that vary greatly from lender to lender and from buyer to buyer. This means it’s important to understand what you’re looking for and talk to a lot of different lenders to ensure you’re getting the best deal possible.
Types of Mortgages
Here are a few basic types of mortgages used by the majority of home buyers:
Conventional Mortgage:
This is the standard loan used by buyers with good to excellent credit who make down payments of at least 10%. However, there are programs that offer options for lower down payments based on buyer credit and location.
FHA Mortgage:
They are insured by the government through the Federal Housing Administration. This is done through mortgage insurance which is funded into the loan. It is a good choice for first time home buyers who can take advantage of incentives like low or no down payments and lowered or no credit score requirements. They offer a down payment as low as 3.5% and lower interest rates. However, FHA mortgages do also require mortgage insurance premiums, which can result in higher overall costs.
VA Mortgage:
All veterans and active military members qualify for VA loans. It may also be issued to the spouses of deceased veterans. These offer up to 100% financing, simplified loan approvals, and lower interest rates. They can be much lower than conventional loans. The Department of Veteran Affairs guarantees the loans but they are funded by a conventional lender.
USDA Mortgage:
These loans are available to buyers in rural or low-density areas and offer up to 100% financing and below-market interest rates. Their ideal buyers are of average means, have lower credit scores, and are buying modest homes. Additionally, because of the government’s loose definition of the term “rural,” some of the buyers in the smaller communities surrounding Saint Petersburg and Tampa will qualify for this loan.
Interest Only Mortgages:
Interest is charged on every kind of home mortgage loan. However, this loan is so called because a borrower has the option to only pay the interest charged on a loan. This option is only available with this kind of loan and it given for only a specified period of time.
There are also some junior mortgages that are interest only where a borrower is required to make a balloon payment which is the amount borrowed which is calculated on maturity. The loan is also sometimes called balloon mortgage loans.
What Do Most Mortgages Include?
*excluding interest only mortgages*
There are four main components to a mortgage payment, often abbreviated as “PITI.”
Principal:
This is the repayment of the initial amount you borrowed from your lender (in other words, the price of your home).
Interest:
This is a payment to the lender for the money borrowed (and is then added on to the initial price of your home).
Taxes:
Your annual city and county taxes assessed on your property are divided by the number of mortgage payments you make in a year and added into your mortgage.
Insurance:
Your monthly homeowner’s insurance payment covers you against various hazards and is added to your mortgage payment.
Going Loan Shopping and Understanding Your Options:
Before you decide on any particular loan or lender, it’s important to do your research. That means meeting with AT LEAST two different lenders to ensure that you’re getting the best rate possible. It’s also important to understand two different types of interest rates offered by mortgage lenders.
Fixed-Rate Mortgage:
The interest on an FRM will not change, so your monthly payments won’t change, making them very predictable.
Adjustable-Rate Mortgage:
The interest rate on an ARM will often be lower initially, but as interest rates do fluctuate with the market, they can be somewhat unpredictable or even result in higher payments.
Calculating Your Monthly Budget:
Now that you know what loan options are available to you, what you can expect to pay as a down payment, and what your likely interest rates will be, it’s time to determine how much you can afford to pay every month, which will then be used to calculate the price range of your home.
Keep in mind that your mortgage costs will be based both on the price of the home and the CURRENT interest rates. A home’s affordability can vary from one day to the next based on the current rates.