California Mortgage Banker Bill Rayman Discusses Mortgage Loan Types and How to Choose What Is the Best Home Loan for You
|Example of different mortgage rates on July 20, 2012|
Fixed rate mortgages can provide different terms options. A 15-year fixed term offers a lower interest rate than a 30-year term; however, the longer term will help keep monthly payments lower. If your budget can handle it, the shorter term and lower rate will save you tens of thousands of dollars over the life of the mortgage. For example, a $300,000 mortgage at 3.500% for 30 years and monthly payment of $1,347 will cost you $185,000 in interest. A 15-year term at 3.000% may have a higher payment of $2,071 but total interest for the loan is only $73,000 – a savings of $112,000 in just the first 15 years, roughly $7,500 per year.
Adjustable rate mortgages (ARMs) provide the lowest starting rates which can be fixed for the first five seven of 10 years. Historically, ARMs offer the least expensive approach over the term of the loan and are an excellent choice if you expect to move within a few years. Because the rates will change after the fixed period, they are not the right choice if you are not confident of being able to handle larger payments in future years.
FHA Home Loans and Private Premium Mortgage Insurance (PMI). For purchases, lenders typically want 20% down payment; any amount less and they can require you to pay additional monthly fees for mortgage insurance (MI) which insures the lender against default. Whether you don’t have the 20% or choose to use a smaller down payment, MI is a viable, often unappreciated, path. There are two types of insured loans. One is from the FHA which lets you move into a home with as little as 3.5% down. The cost for putting so little of your own money down is an upfront fee to the FHA of 1.75% of the loan amount (you don’t need cash; they will add it to the loan) as well as a monthly fee of 1.25% of the loan for at least 5 years.
Please view our video on FHA Loans for a more in-depth discussion. http://www.youtube.com/watch?v=EU_PU59RFKA
The other type of insured mortgage is a conventional loan with Private mortgage insurance(PMI). These require at least 5% down, but there is no upfront fee and typically less than 1.00% per month depending on the borrower’s credit score and down payment percentage. Another advantage of PMI: it can be cancelled after 2 years when there is 20% equity in the home from any combination of paying down the loan and the home appreciating in value. Typically insurers require higher FICO scores than the FHA allows.