When choosing a home loan, it feels like the options are endless. The team at Saint Charles Mortgage LLC will help you decide which mortgage option is best for your short-term and long-term needs. Below, we’ve explained several types of loan options that we specialize in.
Loan Options
The fixed-rate mortgage is the most popular loan option in Texas and Missouri with predictable payments that remain the same for the life of the loan. With a fixed-rate loan, your interest rate will never change for the term of your mortgage. The shorter your loan term, the lower the interest rate tends to be. While fixed-rate mortgages can have very competitive interest rates, keep in mind they won’t be the lowest advertised.
Adjustable-rate mortgages usually have interest rates that are lower initially than a fixed-rate mortgage although they are subject to adjustment. The benchmark mortgage in the U.S. is the 30-year fixed-rate mortgage but you can also choose a 10-year, 15-year, or 20-year mortgage. With a 15-year fixed-rate loan, your interest rate will likely be lower, and you will build equity faster, but you will have higher monthly payments compared to a 30-year loan.
If you want a budget-friendly and stable monthly mortgage payment, a fixed-rate home loan may be a good fit. The only real drawback with this loan option is you can get a lower initial interest rate with an ARM. If you only plan to be in your home for 5 years or less, an ARM may offer substantial savings.
Unlike a fixed-rate mortgage, an adjustable-rate mortgage has an interest rate that changes periodically with payments that may go up or down. Most ARMs today have an initial period with a fixed rate followed by a much longer period in which the interest rate adjusts at preset intervals. After the fixed-rate period, the interest rate on the loan will adjust based on another interest rate called the index.
This index is a rate set by market forces. There are dozens of indexes, but your ARM will be tied to a specific index. When your rate resets, an agreed-upon margin (or percentage points) will be added to the index rate to determine your new loan rate.
While an ARM isn’t for everyone, it comes with numerous benefits over the traditional fixed-rate loan. The initial interest rate on an ARM is lower than a comparable fixed-rate loan. It’s also possible for interest rates to go down. ARMs are usually best-suited for buyers who plan to sell the home after a few years and homeowners who expect their income or finances to improve in the next few years.
This mortgage option combines the features of an ARM and a fixed-rate mortgage. This type of loan comes in many forms. A hybrid ARM has a fixed rate for a specific amount of time, such as 3, 5 or 10 years, with an adjustable rate component on the back end of the loan term during which the interest rate will adjust every year.
This option comes with a clear advantage: a lower initial interest rate than a fixed mortgage with payments that will be predictable for a period of time. Another popular option is a graduated payment ARM which offers initial low payments that gradually increase at pre-determined times. During the early years of the loan, the balance negatively amortizes but the principal is paid off at an accelerated rate through the later years of the loan.
FHA loans are mortgages backed by the Federal Housing Administration. There are several characteristics that make the FHA loan program unique including the ability to put down as little as 3.5% and more flexible underwriting that allows you to get approved even with thin credit or credit problems.
You can even use gifted money for your down payment with an FHA loan. The downside to an FHA loan is you will need to pay mortgage insurance premiums (PMIP). The PMIP comes in two forms: an upfront premium paid at closing or rolled into the loan (1.75% of the loan amount) and an annual premium paid monthly.
FHA mortgages remain very popular among first-time homebuyers as well as buyers who have low credit score issues or a low down payment that make it difficult to qualify for a conventional mortgage.
VA loans make it easier for veterans and their families to buy a home. If you are a qualifying veteran or active-duty military member, a VA loan is likely the best mortgage option available. VA home loans are guaranteed by the Department of Veterans Affairs and have no minimum credit score requirement, no down payment requirement, and no mortgage insurance.
If you do not have the money for a down payment, a VA loan is one of the only 0% down mortgage options available. VA mortgages typically have lower costs than other mortgages as well although there is a one-time funding fee that must be paid.
This funding fee depends on the veteran type, down payment, and whether it’s the veteran’s first time taking out a VA loan. The fee ranges from 1.25% with a 10% or more down payment to 3.3% with no down payment and a second or subsequent use.
USDA Loans
If you are buying a home in a designated rural or suburban area of Texas and Missouri, a USDA loan may be your best loan option. USDA loans are 0% down payment mortgages issued through the USDA program. This is one of the only mortgage options available to buy a home with no down payment and they’re designed for borrowers who can’t qualify for a traditional mortgage.
Along with the very relaxed down payment guidelines, USDA loans come with looser credit requirements than most mortgage programs. Rural areas are always eligible for USDA loans but there are opportunities in some suburbs surrounding metropolitan areas as well.
A conventional loan is simply a mortgage that isn’t backed by the government like a VA, USDA, or FHA loan. Conventional loans, also called conforming mortgages, also adhere to loan guidelines set by Freddie Mac and Fannie Mae. These loans are offered through banks, credit unions, private lenders, and other private entities with many advantages over government-backed mortgages.
There are 2 conventional loans available. One for 3% down and one for 5% down minimum. 20% down will remove any mortgage insurance premiums. If you have good to excellent credit, you will likely get a great interest rate and NO up front government fees in a conventional mortgage.
A jumbo mortgage is a home loan that exceeds conforming loan limits. This means a jumbo mortgage can’t be purchased or guaranteed by Fannie Mae or Freddie Mac. In most parts of the country, the conforming loan limit for a single-family home is $453,100. This limit is increased in high-cost areas to $679,650. While jumbo loans work in much the same way as conforming loans, they often come with more stringent requirements.
For example, a jumbo mortgage may require two appraisals during the underwriting process instead of just one appraisal. A higher down payment of anywhere from 15% to 30% may also be required. With a jumbo mortgage, you can borrow more than you could with a conventional home loan as long as you can meet the strict qualifications.
If you are considering a home priced at more than $453,000, a jumbo mortgage is the easiest way to finance your purchase. There is another strategy called piggyback loans which involves taking out two smaller loans although this can come at a much higher price than a jumbo mortgage.
If you are a first-time homebuyer or a qualifying low- to moderate-income family, you may qualify for numerous state and local housing programs that offer down payment assistance, closing cost assistance, financing, and tax credits. One of the most powerful programs is the Mortgage Credit Certificate (MCC) program which offers a partial tax credit for the interest you pay on your mortgage every year.
In Texas, an MCC can save you up to $2,000 on your taxes with a credit of 40% of your mortgage interest paid. In Missouri, the MCC program offers a tax credit of 25% of your mortgage interest. Down payment assistance programs can offer a grant or deferred loan of up to 5% of your loan amount. In most cases, the money you receive through the program is a gift that does not need to be repaid. Depending on the loan type you choose, the program may offer the full minimum down payment you need to buy a home.
At Saint Charles Mortgage LLC, we can help you find local and state housing programs that you may qualify for to make your dream of homeownership easier to reach.