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Posted October 11, 2015
in Mortgage Strategy

So Many Mortgage Choices: Which Is Best For You?

U.S. Housing : Homebuyer's guide to buying a home and picking a suitable mortgage

Current Mortgage Rates Near 4%

The U.S. housing market is strong, and gaining momentum. Home sales are rising, home prices are up, and builders are as confident as they've been all decade.

Low mortgage rates are helping, too.

Conventional mortgage rates have hovered near 4% since October of last year, and FHA mortgage rates and VA mortgage rates register even lower. Even better, mortgage lenders are approving far more applications than they're denying.

If you're among the many people who plan to purchase a home this year or next, then, you'll want to make sure you understand the process of it all.

Understanding the process of buying a home can help you save money on your home, and save money on your mortgage, too.

All you have to do is "follow the steps".

Click to see today's rates (Nov 26th, 2015).

First, How Much Do You Want To Borrow?

For today's home buyers and households looking to refinance, there are multiple types of home loans available. A mortgage lender can offer you guidance, but it will be your responsibility to choose the most suitable mortgage program for your long- and short-term needs.

The first area in which to focus is "loan size"; how much money you'll want to borrow.

Mortgage calculators are available online and some will provide some insight into how much you should be borrowing.

It's a good idea to know how much you want to spend each month, or how much you want to put down as a downpayment (in dollars) before getting started. You don't need both figures here -- just one of them.

Once you know your maximum monthly payment or downpayment expectation, you can often work backwards in a mortgage calculator to determine "how much home you can afford".

Many mortgage calculators will do this math for you.

Note, though, that a mortgage calculator's "maximum loan size formula" won't tell you how much you should borrow from a bank -- instead, it will tell you how much you can borrow from a bank.

Only you know how much you're comfortable spending each month or putting down as a downpayment. That's why it's important to know your financial situation, so you can choose a mortgage loan size that works best for you.

Click to see today's rates (Nov 26th, 2015).

Next, Is FHA Best? What About VA or USDA? Conventional?

Today's most common mortgage is the conventional loan and more than 65% of home buyers opt for the 30-year fixed rate option. Just because it's most popular, however, doesn't mean it's the loan best suited for you.

A "conventional mortgage" is one which is backed by Fannie Mae or Freddie Mac. Conventional loans are limited by size and may not be used for homes of more than 4 units.

Conventional mortgage loan limits are $417,000 in most parts of the country, but range up to $625,500 in certain "high-cost" zones. You can lookup your area's mortgage loan limits here.

One popular conventional mortgage program is the Conventional 97, which allow for a minimum downpayment of just three percent on a home.

Among the most popular of the non-conventional mortgages is the FHA loan.

FHA loans are loans insured by the Federal Housing Administration, and available via traditional mortgage lenders. FHA mortgages provide comparable mortgage rates and terms versus conventional financing, and have become popular as a result of lenient approval standards and low down payment requirements.

For example, the FHA requires just a 3.5% downpayment on most purchases; and its pricing can be more aggressive for home buyers whose FICO scores are below 740.

In 2015, FHA loans are available up to $625,500 for a one-unit home, and up to $1,202,925 for a 4-unit home.

Another non-conventional loan type is the VA loan, backed by the Department of Veterans Affairs. VA loans are available to military borrowers, require no downpayment whatsoever, and carry no mortgage insurance requirement.

VA mortgage rates have been the lowest of all common mortgage rate types for the last 12 months, at least. VA rates are currently close to 37.5 basis points (0.375%) below comparable conventional ones.

In total, there are more than half-dozen loan "types" from which a home buyer can choose. The better you understand your options, the better choice you'll make for your finances.

Click to see today's rates (Nov 26th, 2015).

Which Is Better? Fixed-Rate vs Adjustable-Rate?

Mortgage products come in many varieties, and there is usually a "best fit" given your financial goals. For some buyers, adjustable-rate mortgages (ARMs) are a superior choice to fixed-rate mortgages.

If you plan to live in your new home for a small, finite number of years, the low, introductory rate offered during the first few years of an ARM may work to your advantage. This is because of how ARMs are constructed.

An adjustable-rate mortgage typically offer lower interest rates during an initial period of years, after which the mortgage rate can fluctuate to meet current market conditions.

ARMs are offered with initial teaser rates lasting three, five, and seven years, typically.

There are 10-year ARMs, too.

By contrast, the mortgage rate of a fixed-rate mortgage does not change.

With a fixed-rate loan, homeowners keep the same interest rate for the life of the loan, which allows a homeowner to make fixed housing budget, notwithstanding changes in real estate taxes and homeowners insurance.

Fixed-rate mortgages are offered in 10, 15, 20, 25 and 30 year terms.

15-year and 30-year loans are the most common fixed-rate mortgage types. This is because the 15-year fixed rate mortgage and 30-year fixed rate mortgage tend to offer the lowest rates relative to other fixed-rate products.

A 20-year mortgage rate is only marginally lower than the rate for a similar 30-year loan but the payment can be 21% higher. For many homeowners, that's an unattractive trade-off.

It's worth noting, though, shorter loans mean less mortgage interest paid over time.

A homeowners opting for a 15-year mortgage over a 30-year will pay 65% less mortgage interest over the life of the loan. The money saved is palpable and can be used to fund retirement, investments, and even a college education (or two).

When choosing between an adjustable-rate mortgage and fixed-rate one; and choosing your loan term, consider current market conditions, your personal economy, and the length of time you plan to live in the home.

Click to see today's rates (Nov 26th, 2015).

Do You Know Your Credit Score?

Your credit score will play a large role in determining which mortgage product best suits you, and the mortgage rate for which you'll ultimately qualify.

If you don't have perfect credit, you can work on improving your credit score prior to applying for a home loan. High credit scores will help you get access to additional mortgage options as compared to a person with low credit scores; and will often grant you more aggressive mortgage rates.

There are two quick ways to improve your credit score.

One, spend your money responsibly; and, two, pay your bills on time. These two factors account for 65 percent of your credit score.

The remaining thirty-five percent of your credit score is split between the types of credit you use (e.g.; credit card vs. auto loan) and the other factors including how much credit you're using at any given time.

If you haven't received a copy of your credit report from your mortgage lender or otherwise, be sure to ask, then check for errors or inaccuracies. Should you find any, have them fixed.

What Are Today's Mortgage Rates?

When you're planning out your purchase, there's a lot of good research available online. Mortgage calculators, expert insight, and plug-and-play mortgage calculators can help you do your legwork; and there's no shortage of opinions on the state of today's housing.

Take a look at today's real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.

Click to see today's rates (Nov 26th, 2015)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2015 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)