As of this writing, the average credit score in America has reached an all-time high…
Buying your own house can be exciting! But it’s not your usual application for personal loans. When you decide to finance your home through a mortgage loan, this automatically means that you will be paying higher than its purchase price after a years-long period. This is why it is essential to understand how mortgage rates work because it will depend on the interest rates how much you’ll be paying monthly until you can call your house your own.
Today, let’s take a look at the different mortgage options you can choose from.
Mortgage Loan Options
To find out which is the best mortgage program for you, it is necessary to know the different loan options at your disposal. However, the decision will still boil down to your particular circumstances, if you want to buy a home but have a less than a stellar credit score or refinance your home to get more liquidity.
If you are confident enough with your credit history and already have a sizable amount of savings, you can apply for conventional loans that private mortgage lenders back. The main reason that people choose this over a government loan is that you’ll eventually pay for a cheaper mortgage overall due to its attractive interest rates.
Remember, a lower interest rate paid over a longer period will yield you a greater total than a higher interest paid over a shorter period. Depending on the amount of money you have been able to put aside before applying for a loan, you can significantly reduce your monthly payments with a bigger down payment.
A lot of borrowers who skip conventional loans do so to avoid private mortgage insurance. However, if you can reach at least 20% home equity (the percentage of the loan amount you can put forward), you can actually request this to be removed so you can lower your monthly expense! Once your home equity also reaches 22%, most lenders automatically remove insurance fees without waiting for homebuyers’ requests.
The opposite of a conventional loan is a federal government-guaranteed loan. There are three types of government-insured loans that you might qualify for FHA, VA, and USDA loans.
Federal Housing Administration Loan
Otherwise known as FHA loans, this is the usual alternative to conventional loans, especially if you don’t have the credit score and savings to qualify for a privately backed mortgage. It is extremely popular with first-time homebuyers, because you will have a higher chance of qualifying for an FHA loan than with any other mortgage loan program, even on low credit.
The minimum credit score required for an FHA loan is 580, which will qualify you for a down payment as low as 3.5 percent. However, if you still fail to meet the 580 credit score requirement, and your number falls between 500 and 579, you can still qualify for an FHA loan provided that you can put down a 10% payment. What’s more, is that the down payment needed to secure your mortgage application does not have to be drawn completely from your personal savings. The FHA allows for up to 100% of your down payment to be taken from a cash gift or a grant.
The FHA also gives chances for borrowers who have been through bankruptcy and even foreclosure. Instead of reviewing the application based on the existing credit report, they look at more recent history, including employment and utility payment records. For this reason, FHA loans are an appealing choice whether you are buying a home for the first time or simply looking to refinance your mortgage.
U.S. Department of Agriculture Loan
On the other hand, if you are looking to settle in rural real estate with zero funds for a down payment, you can apply for a USDA loan. You don’t have to be a farmer or belong to a particular industry to qualify for this type of mortgage. As long as you are a U.S. citizen with a dependable income and no accounts recently converted to collections (up to a year before your application), the USDA can assist you in securing your mortgage loan.
However, income and household limits depend on the state you are looking to purchase your house in, and you can check this table to find out if you qualify.
Veterans Affair Loan
This is a mortgage exclusively offered to military veterans, service members, and their immediate family guaranteed by the U.S. Department of Veterans Affairs.
Due to the very nature of their employment, it is common for service members to encounter roadblocks when applying for a mortgage. VA loans exist to provide them with the opportunity to get access to lenders without the need for a down payment and despite a poor credit profile. This is a hard-earned job benefit that offers them a very competitive interest rate compared to privately backed loans that even require premium payments for mortgage insurance.
Now that we have a better idea of the available options in mortgages, it’s time to delve into the interest rate mortgages offer, of which there are two types we shall compare.
The crucial thing about debt that it makes all the difference between allowing you to put enough money away into savings or costing you in fees than you rightfully deserve the interest rate. This makes it all the more significant to understand if you should take a fixed-rate or adjustable-rate home loan.
Fixed-Rate Mortgage (FRM)
When you get an FRM, this means that the interest rate applied to your monthly payment will be the same throughout the time you will be paying for your home loan. Regardless of the economy suffers its highs and lows (affecting mortgage rates and fees), you will be protected from upwards changes in costs.
For many, an FRM is a preferable option. The interest rate adjusts all the time, and you might not want to be bothered with varying your expenses every time you need to make your monthly payment. After all, who has the time and resources for that?
Adjustable-Rate Mortgage (ARM)
Now, if you don’t want a fixed rate of interest and don’t mind riding the flow of the economy, you can opt to apply for an adjustable mortgage interest rate (ARM). An ARM allows you to pay the variable or floating interest rate according to the prevailing index.
While an FRM protects you from increases in costs, an ARM protects you from paying more than the actual fees based on the current rate loan markets offer. Especially in a recession where the interest rates of home loans can continue to decrease, you wouldn’t want to stay with an FRM that might oblige you to pay more than your loan is worth.
Many people do not know this but, depending on your mortgage lender, you can actually negotiate your monthly payment with the bank. And that makes sense because why should you stick with an FRM when converting to an adjusted mortgage rate that will make it easier for you to pay off your loan? Provided that you have a better-established credit history, this is a good strategy that many borrowers have embarked on. A little know-how on the process can indeed save you a pretty penny!
You can check out this link for the current going rate of a 30-year fixed-rate mortgage, ARM, and more.
Today, everything we need is just a tap or a click away online. Mortgage applications are no different. If our forebears had to go to the bank to present their qualifications physically, we now have to upload our documentation and fill out online forms with our personal details.
Depending on the mortgage type you want to apply for, most of the mortgage options we have discussed are available at Quicken Loans, one of the biggest lenders in the United States. A lot of Quicken Loans’ success is owed to its online loan product, Rocket Mortgage, which allows you to completely experience the whole loan process from application to monthly payment online.
When Quicken Loans launched Rocket Mortgage in 2015, they ambitiously claimed that their loan application process could finish in as fast as 8 minutes. Quicken Loans has since dialed down on this claim; however, borrowers still appreciate the convenience of getting a mortgage online. Since 47% of people don’t bother shopping around for loans, this has only enabled Quicken Loans to become the largest online lender over the years.
If you prefer doing your business on location, you can still opt for a personal application at your local bank. In fact, you might be left with no alternative in case you are aiming for a USDA loan. The nearer your lender, the cheaper your personal and closing costs and other payments can be. You can shop around for a better rate offered by the competition and bring this argument to your bank in your favor. After all, the bank might be lending you money, but you are still bringing them business as a paying customer!