Choosing the Best Mortgage Loan for You

Before approaching a lender and starting the process of filling out a mortgage loan application, you can benefit from an understanding of the different types of mortgages available and the advantages and disadvantages of each.

Conventional Fixed Rate Mortgages

A fixed-rate mortgage is a home loan that has a predetermined and unchanging — or “fixed” — interest rate for the entire term of the loan.

Benefits & Details:

    • Fixed Rate Mortgages make up more than 75% of all home loans. Typical loan terms range from 10 to 30 years. While the 30-year option is the most popular, a 15-year term builds equity much faster.
    • The interest rate remains the same for the entire term of the loan, enabling easier budgeting for the homeowner.
    • Low down payment options are available.
    • It is easy to compare loan offers of this type, by looking at the differences in the fixed rates from different lending institutions.

A Conventional Fixed Rate Mortgage could be right for you if:

    • You plan to stay in your home for seven years or more.
    • You are concerned that interest rates might rise in the future, and you want to lock in your current rate.
    • You have the ability to provide a 20% down payment, as this will not require Private Mortgage Insurance (PMI). If you put less than 20% down, PMI will be removed after you pay down the loan to 78% of the starting balance.

Conventional Adjustable Rate Mortgages (ARMS)

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that varies over the life of the loan. Usually, the initial interest rate is locked in for a specific time period, after which it changes periodically based on market conditions and the terms of the loan. For example, the interest rate might be fixed for five, seven, or ten years, then adjust every year thereafter. A 5/1 ARM would have a fixed interest rate for the first five years and then convert to an adjustable rate, with annual adjustments for the remaining term of the loan.

Benefits & Details:

    • ARMs typically offer lower payments during their initial fixed term than a fixed–rate mortgage.
    • The interest rate adjusts periodically to reflect market condition within a predetermined time frame. There may or may not be a cap on the amount the rate can increase and number of times it may change over the term of the loan.
    • The initial rate can be locked in for a period of time as specified in the loan terms.

An ARM loan could be right for you if:

    • You anticipate owning your home for only a short period of time and will likely sell before the introductory fixed-rate period ends.
    • You can afford to make larger monthly payments should interest rates rise.
    • You have reason to believe interest rates may go down in the future.
    • Over 25% of your income is derived from commission, bonuses or distributions annually or throughout the year.

Federal Housing Administration (FHA) Loans

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, an agency of the U.S. Department of Housing and Urban Development (HUD). Borrowers pay for mortgage insurance that protects the lender from a loss if the borrower defaults on the loan. Loan terms range from 15, 20, to 30 years and interest rates are fixed but adjustable Interest rate options are available. These loans are guaranteed by the government, so lenders offer attractive interest rates with less stringent qualification requirements.

Benefits & Details:

    • FHA loans offer low down payment options, including assistance from third party organizations and agencies, and the ability to use gifted funds for the down payment and closing costs.
    • Applicants should have a fair-to-good credit score, proof of employment, and a steady income.
    • There may be no reserve requirement for one- to two-unit properties.
    • Seller concessions of up to 6% are allowed.
    • Purchases can have up to a 96.5% loan to value ratio (LTV).
    • Refinances can have up to a 97.75% LTV.
    • Cash-out refinances can have up to an 85% LTV (not available in Texas).
    • These loans are backed by the FHA.

A FHA loan could be right for you if:

    • You qualify based on income and other factors.
    • You have limited income and funds for a down payment (a down payment can be as low as 3.5%).
    • You have less than perfect credit.

Veterans Affair (VA) Loans

A VA loan is a mortgage loan that is guaranteed by the Department of Veterans Affairs (VA) for those who have served or are presently serving in the U.S. military. While the VA does not lend money for VA loans, it backs loans made by private lenders (banks, savings and loans, or mortgage companies) to qualifying veterans, active military personnel, and military spouses.

Three types of VA loans exist: Purchase Loans, Interest Rate Reduction Refinance Loans (IRRRL, also know as a “VA streamline refinance loan”), and Cash-out Refinance Loans. VA loans have many benefits; one of the greatest is that no down payment is needed to purchase a home. This factor makes home ownership a reality for active military or veterans who might not otherwise be able to afford to buy a house.

If you are a veteran, an active-duty service member, or a member of the Guard or Reserve, you may be eligible for a VA loan. A VA loan can be used to purchase or refinance one- to four-unit properties with terms ranging from 10 to 30 years. Learn more at VA benefitsor call 1-800-827-1000.

Benefits & Details:

    • VA loans are partially guaranteed by the VA, allowing private lenders to provide better terms, such as 100% LTV without PMI and no down payment (in many cases).
    • They are available to veterans or active-duty military with a VA Certificate of Eligibility.
    • VA loans are offered for existing owner-occupied, one to four family Planned Unit Developments (PUD) or VA-approved condos.
    • Purchases have up to 100% LTV.
    • Cash-out refinances have up to 90% LTV (not available in Texas).
    • These loans have the ability to finance the VA funding fee.
    • No monthly PMI is required.
    • Gift funds from immediate family are allowed for up to 100% of closing costs or the down payment.
    • Seller concessions are allowed for 100% of closing costs, plus up to 4% of the purchase price toward prepaid expenses.

A VA loan could be right for you if:

    • You are a current or former member of the U.S. Armed Forces, or the current or surviving spouse of one.
    • You qualify for a VA home loan as a veteran or reservist.

Jumbo Mortgage Loan

Also known as a “non-conforming mortgage,” Jumbo Mortgage Loans are available to borrowers with a need to finance an amount greater than the conventional limit on an eligible primary residence or secondary/vacation home. These loans are available with both fixed and adjustable interest rates for terms between 10 and 30 years. Jumbo Mortgage Loans do not “conform” to the guideline requirements of Fannie Mae and Freddie Mac loans.

Benefits & Details:

    • Loan amounts are available for up to $3.5 million with fixed and adjustable-rate options.
    • Financing is available for up to 90% of a home’s value with no PMI requirement for a purchase or a refinance.
    • Financing of up to 80% on a cash-out refinance is available.

A Jumbo Mortgage Loan could be right for you if you are in the market for a higher priced home.

U.S. Department of Agriculture (USDA) Loan

A USDA home loan is a zero-down payment mortgage for eligible rural and suburban home buyers. USDA loans are issued through the USDA Loan Program, also known as the USDA Rural Development Guaranteed Housing Loan Program.

The USDA guarantees a variety of loan types to help low or moderate-income citizens purchase, repair, or renovate a home in a rural area. These include: the Single Family Direct Homeownership Loan, the Single Family Guaranteed Homeownership Loan, the Rural Repair and Rehabilitation Loan or Grant, and the Mutual Self-help Loan. For eligible buyers, these loans feature benefits such as 100% financing with no down payment and below-market mortgage rates.

Though the terms and details of these loans differ, all USDA loans offer very low effective interest rates (some are as low as 1 percent), and don’t require a cash down payment. To qualify, a fair to good credit history is required. Not all properties qualify for USDA loans, so be sure to visit the USDA website to see if yours meets the requirements.

Benefits & Details:

    • No down payment is required.
    • Interest rates are lower than market rates.
    • Monthly PMI costs are low.
    • USDA loans offer the ability to finance PMI upfront.
    • Credit guidelines are flexible.

A USDA loan could be right for you if:

    • You live in a rural environment.
    • You do not have a high income.
    • You have blemished or limited credit.
    • You are unable to secure a home loan from traditional sources.

Herring Bank is here to guide you through the process from start to finish. Give us a call at (866) 236-4779 or request a call below to discover how we can lend the way to your next home!

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