Buying a new home is exciting but can also be overwhelming when trying to determine which financial option is the best fit for you. You should do your homework and we at Bouwman Realty Group are more than happy to guide you through the process!
There are a variety of mortgages to choose from. Mortgage loans are typically categorized as either fixed rate or adjustable rate. Sometimes they can even be a combination where the rate is fixed for a certain period of time and then converts to an adjustable rate for the remainder of the loan term. Common loan terms are 30 or 15 years, Some are as short as 10 years and can be 20 and 25 year terms in some instances.
In most cases, the shorter the loan terms the lower the interest rate (but the higher the payment since the loan is being amortized over a shorter period of time). As an example, total interest paid in a 15 year
loan may end up being less than half what you’d pay on a 30 year loan, but your monthly payments will be higher.
- Common Loans
- Fixed Rate Mortgage Loans
- Adjustable Rate Mortgage Loans (ARMs)
- Hybrid Mortgage Loan
- FHA Mortgage Loans
- VA Mortgage Loans
- Rural Development (RD) Mortgage Loans
- 203k Rehabilitation Loans
Fixed Rate Mortgage Loans
The interest rate is fixed for the life of the loan, regardless of what rates do over the life of your loan. This ensures that your payment remains the same each month, which can make budgeting a lot easier. However, if your loan has an escrow account that is collecting for taxes or insurance, that likely will change over time and cause your payment amount to change annually.
Adjustable Rate Mortgage Loans (ARMs)
The interest rate changes periodically by adding what’s referred to as a “margin” to an index specified in mortgage documents. These two numbers are combined to create the loan’s interest rate and often times have limits (sometimes referred to as “caps and collars”) that ensure the rate does not increase over a certain amount over the life of the loan. As an example, a 1-year ARM will adjust every year, typically on the anniversary date of the loan.
Because the rate changes as the index changes with fluctuations in the market, monthly payments on an adjustable rate mortgage loan likely will be different every year. However, if you are planning on being in your home a short period of time, an ARM may be a very good option with a lower interest rate.
Hybrid Mortgage Loan
The typical hybrid mortgage loan combines an initial fixed interest rate for a specified period of time and then converts to an adjustable rate for the remainder of the loan term. Because these loans have a variety of options, they can often times serve a wider variety of borrower needs (and qualification standards are often more lenient than a traditional loan).
FHA Mortgage Loans
Despite what many people think, the Federal Housing Administration (FHA) does not actually issue mortgage loans, it provides mortgage insurance which protects lenders. Customers like FHA loans because they have more liberal qualification requirements, much like hybrid mortgage loans (mentioned earlier).
In addition, they typically have a lower down payment requirement (as low as 3.5%), lower monthly insurance premiums and often have lower closing costs! A Michigan FHA loan is a home loan that is insured by the Federal Housing Administration. Home owners are able to purchase a home with a low down payment as low as 3.5% of the purchase price. The government insures the lender against losses so banks are able to offer you the low FHA mortgage rates. This flexible home loan option is perfect for first time home buyers that have no established credit or little money for down payments.
FHA mortgage rates are typically lower than the conventional loan program. With FHA loans being insured by the federal government, banks and mortgage lenders have less risk offering loans for home
buyers and for FHA refinancing.
VA Mortgage Loans
Similar to FHA loans, VA loans are guaranteed by the U.S. Department of Veteran Affairs and lenders make the loans to eligible veterans for the purchase, construction, or energy-saving improvement (approved by the lender and VA) of a home. VA loans share similar eligibility requirements as FHA loans, often with lower closing costs, and more liberal terms (usually without requiring a down payment) and even negotiable interest rates. If you qualify, the VA will issue a certificate of eligibility that you can provide a lender when making application for your loan.
Rural Development (RD) Mortgage Loans
A USDA Rural Development loan can help you purchase your dream home with little to no money down. The property must be in an eligible USDA Rural Development area and certain income qualifications apply. Under the Guaranteed Loan program, Rural Development guarantees loans made by private sector lenders. (Aloan guaranteed through RD means that, should the individual borrower default on the loan, RD will pay the private financier for the loan.) The individual works with the private lender and makes his or her payments to that lender.
Under the terms of the program, an individual or family may borrow up to 102% of the appraised value of the home, which eliminates the need for a down payment. Since a common barrier to owning a home for many low-income people is the lack of funds to make a down payment, the availability of the loan guarantees from RD makes the reality of owning a home available to a much larger percentage of Americans. You may be pleasantly surprised to find out that eligible Rural areas can include subdivisions and properties in town.
203k Rehabilitation Loans
One of the most popular and diverse home improvement loans is the FHA 203k. You can make home improvements to the house you want, or the home you already own. Use the funds for simple upgrades to your home like a kitchen or bath improvement, or to completely reconstruct a home that is presently unlivable. You can even use a 203k Rehabilitation Loan to tear down an existing structure and build a new one using some portion of the existing foundation. You can borrow up to 96.5% of the appraised value -based on the value when the improvements or repairs are completed.
MSHDA offers programs that assist both first-time homebuyers and repeat buyers in Targeted areas with Down Payment Assistance up to $7,500. These funds can be used towards the down payment, closing costs, taxes and insurance that are due at closing. This greatly reduces the cash needed to close on a home purchase.