Home Financing 101: Pt. 2

Conventional mortgages are the most common type of mortgage and are generally used on your primary property or investment property. These loans have the least amount of regulations when it comes to income, home type and home location qualifications. However, conventional loans do have stricter regulations on your credit score and debt-to-income ratio.   With conventional mortgage loans, you can buy a home with as little as 3% down and you will need to have a credit score of at least 620 to qualify.  

One thing to remember with conventional loans is the possibility of a lender requiring you to carry Private Mortgage Insurance (PMI).  This will only be the case if you put less than 20% down. However, once you hit 20% equity - you can ask your lender to cancel your PMI.

Conventional loans are perfect for those who do not qualify for government backed loans or who might want to take advantage of potentially lower interest rates! 

Pros of a Conventional Loan

- Overall borrowing tends to be lower than other types of mortgages.

- You can pay as little as 3% down.

- Can be used for your primary property.

Cons of a Conventional Loan 

- Minimum credit score of 620 

- You have to have a PMI if you are paying less than 20% down

- You must have a debt-to-income ratio of at least 45-50%

Who Should Get One? Conventional loans are more ideal for buyers who have strong credit, at least 3% down, a stable income and employment.

Fixed Rate Mortgage 

A fixed rate mortgage has the exact same interest rate over the life of the loan. These loans offer you a very predictable month-to-month payment.  A fixed-rate mortgage may be best for those who are already living in their “forever homes”.  Fixed loans are typically 15, 20 or 30 year terms. 

One reason to avoid a fixed-rate mortgage loan would be if interest rates are high in your area.  Once you lock in the rate, you are stuck paying that over the life of the loan. If the rates are high and you lock in your loan, you could end up overpaying by thousands of dollars. 

Pros of a Fixed Rate Mortgage 

- Your monthly payment doesn’t change over the life of the loan.

Cons of a Fixed Rate Mortgage

- You may pay more over time if the interest rates are high in your area.

Who Should Get One?  Buyers that are purchasing or refinancing their “forever homes”!

Adjustable Rate Mortgage Loans

Adjustable-Rate Mortgage loans have fluctuating interest rates that go up and down with the market conditions and have 30 year terms.  Most ARM’s will have an introductory period where you will have a fixed interest rate, sometimes lower than the actual market rates.  

After your introductory period is over, your interest rates will change based on the current market rates.  ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates.

Pros of a Adjustable Rate Mortgage 

- You will enjoy a lower payment with a fixed rate for the first few years of owning!

Cons of an Adjustable Rate Mortgage

- If the rate increases, it can cause your monthly mortgage payments to become unaffordable. 

- If home values fall, it could make it tougher to refinance or sell your home in the future.

Who Should Get One? Someone who is buying a starter home and doesn’t plan to live out the life of that loan in the home.

Interest rates, loan requirements and credit scores can vary. For more information on which loans may be right for you please reach out to a local lender.   

Information for this blog came from: 

Rocket Mortgage - www.rocketmortgage.com
https://www.rocketmortgage.com/learn/types-of-mortgages

Bank Rate - www.bankrate.com
https://www.bankrate.com/mortgages/types-of-mortgages