Posted December 24, 2014Tweet
Every mortgage borrower is unique. And, in today's expanding mortgage market, there is a home loan to match nearly everyone's mortgage needs.
There are mortgage loans for borrowers with large downpayments and small downpayments; mortgage loans for borrowers with high credit scores and low credit scores; and loans for borrowers with special circumstances.
There are also loans for borrowers with military experience; loans for borrowers in rural homes; and, loans for investors who paid cash for a home and now want to "cash out".
Furthermore, there are loans for self-employed borrowers; loans for "just-back-to-work" borrowers; and loans for borrowers with sizable assets but no employment.
With so many loan programs available, it can be a challenge for borrowers to know for which loan they should apply, let alone to know whether they'll get approved.
It helps to know the details of each program as it relates to you. Understanding your options is the first step toward making your best choice.
For today's home buyer, there are plenty of way to buy a home with little or no money down.
For example, the Federal Housing Administration (FHA) makes available a loan requiring a downpayment of just 3.5%; and the Department of Veterans Affairs and the U.S. Department of Agriculture offer the VA loan and the USDA, respectively -- both of which require no downpayment whatsoever.
Furthermore, Fannie Mae and Freddie Mac both offer a loan requiring just a 3% downpayment.
Which of these low/no downpayment loans is best for you? That will depend.
Of all the common loan types, VA mortgages are often most attractive because VA mortgage rates have been lower than comparable conventional rates this year by close to 37.5 basis points (0.375%). However, in order to get approved for a VA loan, you must meet specific eligibility standards.
FHA loans would appear to be the next-best loan because FHA mortgage rates also beat comparable conventional rates, but FHA loans can require a stiff mortgage insurance premium which cancels out the savings.
FHA loans are often the best minimum-downpayment mortgage option for borrowers with credit scores between 580 and 660; and borrowers purchasing a multi-unit homes of 2-4 units.
For home buyers in rural areas and suburban neighborhoods which are less-densely populated, the USDA loan can be a terrific fit. Offering 100% financing, USDA mortgage rates rival VA mortgage rates; and USDA loan mortgage insurance premiums are low.
However, USDA financing only allows for 30-year fixed rate loans.
Lastly, there's the Fannie Mae 97% loan. Mortgage rates are low and underwriting standards are simple. The main draw of the Fannie Mae 97% program is that it allows for downpayment monies to be a gift; and that it's the cheapest, widely-available low-downpayment program available.
Choosing the right mortgage also requires having a strong plan.
Selecting your best loan is about more than finding today's lowest rates -- it's about finding the best possible product at the best possible price.
Just like today's home buyers have a myriad of mortgage options from which to choose, so do households choosing to refinance.
For example, homeowners with an FHA-backed loan may find it better to cancel FHA MIP via a switch to a conventional mortgage as opposed to using the FHA Streamline Refinance, then passively waiting for FHA MIP to expire.
Same for homeowners with military experience who are not currently using the VA Loan Guaranty program.
VA loans offer low rates, access to the VA Streamline Refinance program, and an assumability clause, which means that a future buyer of your home can "assume" your mortgage at its current rate. VA loans can be especially valuable in a rising mortgage rate environment because of this.
There are three main refinance types.
The first is the rate-and-term refinance. Rate-and-term refinances are characterized by a change in mortgage rate, a change in the loan term (e.g.; 30 year loan refinance to a 15-year loan), or both.
Common rate-and-term refinance types include the aforementioned FHA Streamline Refinance and VA Streamline Refinance, as well as the Home Affordable Refinance Program (HARP) and the Fannie Mae 97% loan, which is billed as a HARP 3-type alternative.
The second type of refinance is the cash-in refinance.
With a cash-in refinance, the homeowner brings cash to closing for purposes of paying down a loan. In general, cash-in refinances are used to bring a loan to 80% loan-to-value (LTV) in order to eliminate private mortgage insurance payments.
The third type of refinance is the cash-out refinance.
A cash-out refinance is characterized by the homeowner increasing its loan balance by five percent or more. The "extra" balance is paid to the homeowner as cash, or used to pay credit card debts and other obligations.
For loans with high loan-to-value, banks quote cash-out refinances at higher rates than comparable non-cash out refinances. For this reason, some homeowners prefer to use a different way to access home equity -- the home equity line of credit (HELOC).
The home equity line of credit functions much like a credit card. Homeowners are granted a credit line based on their home's equity and can use that credit line at any time, up to the limit.
For example, a homeowner whose banks grants a $25,000 HELOC can spend up to $25,000 at any time using a bank-issued credit card. So long as there is a balance on the line -- like a credit card -- the homeowner is required to pay interest on it. When the balance is zero, there are no monies due.
Interest rates on a home equity line of credit is based on Prime Rate, which is generally 300 basis points (3.00%) above the Fed Funds Rate and is adjustable. HELOCs offer the flexibility of a credit card but with an uncertain long-term interest rate.
There are a huge number of mortgage options for today's home buyers and refinancing households. Choosing the best program can help you get great rates. Interest rates vary by product so it's important to choose whats best suited to your needs.
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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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