The best home financing for you is as important as the perfect home. You have many options for the type of mortgage, lender and rates to explore.
The best home financing for you is as important as the perfect home. You have many options for the type of mortgage, lender and rates. As you search for your ideal property, explore your many home loan possibilities.
The mortgage terms, such as the length of the loan, the interest rate and your payment options, are the first things to consider. A home loan from a traditional lender is typically for 10 to 30 years. However, some lenders will extend a loan to 40 years and others allow unusual terms like seven years. While you may think that the longest term is the best because your mortgage payment will be lower, you pay more accrued interest for longer loan terms.
The interest rate you get on your home financing depends on the type of loan you choose, your personal credit history and the national interest rates available. You may also lower your interest rate by making a larger down payment or by paying discount points. A discount point is a form of pre-paid interest in which you pay a percent of the total home loan. You can actually “buy down” the interest rate with this upfront payment.
Types of home loans
The type of home loan you choose also dictates your interest rate. A fixed-rate loan has the same rate for the duration of the loan. A 15-year, fixed-rate loan has a lower rate than a 30-year, fixed-rate loan. Typically, a 30-year, fixed-rate loan backed by the Federal Housing Administration (FHA) will have an interest rate lower than a traditional lender’s.
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An adjustable-rate mortgage (ARM) begins with an initial interest rate lower than that of a fixed-rate loan. You may choose an ARM because you want a home financing that starts with the lowest payment possible. ARMs offer lower initial payments than fixed-rate loans, however, that rate adjusts according to your loan terms and the national lending index. So, after the initial period of your ARM, your loan may adjust annually or quarterly. If national lending rates rise, then your mortgage interest rate and your payment rise. Conversely, if national lending rates drop, your rate and payments also drop. An ARM has pros and cons that depend on your personal finances and current interest rates. Right now, interest rates are at historic lows so you may expect your interest rate to go up when an ARM adjusts.
Some lenders still offer home loans that begin with an interest-only period. Since you are only paying the interest, these initial payments are the lowest available, but keep in mind that you are not paying down the principal at all. That means you will have much higher payments when you start paying the principal and the interest.
While you may believe that all mortgages have monthly payment, you actually have several payment options. In addition to monthly payments, you may repay your loan twice a month, every two weeks or weekly. Choosing to pay more often than once a month reduces your principal balance faster and therefore reduces your accrued interest over the life of your loan.
These basic home financing terms and options are available from most lenders. Your lender may be a bank, credit union or only a mortgage lender. You may also choose to work with a mortgage broker whose job is to find the best financing option for you from a list of lenders with whom he or she works.
When you compare lenders, you want to research their reputations, origination fees, underwriters and servicers. A mortgage broker or loan officer at a bank or credit union can provide specific details about the mortgage loans they offer. To research national lenders now, to go Reply!
Underwriters and mortgage servicers
An underwriter gives money to your lender and may actually hold your loan. For example, your mortgage broker may say your loan is with a certain bank, but when you get the bill, it has another entity’s name on it. Mortgage lenders are also known to sell loan portfolios so you could start with one lender and end up with another.
Your mortgage loan servicer is the company that deals with customers and loans. Some banks service their own loans while others employ companies to service their loan portfolios. Your lender cannot transfer your loan to a servicer without notifying you. You may not care who actually applies your payments to your loan, as long as your payments are applied. However, you may not want to work with a specific lender because of its servicer’s reputation.
Federal home financing programs
In addition to the myriad of lenders, home loan programs, terms and rates already discussed, you may also qualify for a loan backed by the federal government. Numerous lenders offer home loans through Federal Housing Administration (FHA) programs. Lenders can offer more flexible terms and lower interest rates on these loans because they are insured by the government.
An FHA loan may be ideal for you if:
- You are a first-time homebuyer
- You don’t have a 20 percent down payment
- Your income is lower than traditional home loan requirements
- Your income will increase drastically over the next few years (you may be a student, a young family, or just starting your career)
- You are buying a HUD home or a fixer-upper
- You qualify for FHA grant programs that cover your down payment or closing costs
The best way to determine your eligibility for FHA loan programs is to contact a U. S. Department of Housing and Urban Development (HUD) housing counselor. He or she can help you find a mortgage program and lenders who offer FHA loans.
Your home financing options may seem overwhelming. The best way to decide which lender and loan is right for you and your new home may be to meet with a few bankers and brokers. You may find that you simply like one lender more than another. Ultimately, you want to pick a mortgage that you don’t have to worry about after you sign the paperwork.