304 North Cardinal St.
Dorchester Center, MA 02124
304 North Cardinal St.
Dorchester Center, MA 02124
Purchasing a home is an exciting milestone in life. However, the process of obtaining a mortgage can be complex and confusing. There are many different types of mortgages, each with their own sets of pros, cons, rates, terms, and qualifications.
Understanding these key differences allows borrowers to make informed decisions on the best mortgage solution for their financial situation and goals.
The most popular mortgage product, fixed-rate mortgages made up 90% of new mortgages in 2022 (Source: Mortgage Bankers Association). With a fixed-rate mortgage, the interest rate and monthly principal and interest payment stays the same for the entire loan term, usually 15 or 30 years.
The predictability of fixed payments appeals to many borrowers. However, fixed rates also come with less flexibility regarding paying off the loan balance. Refinancing is required to obtain a new rate and term.
In 2022, the average down payment for fixed-rate mortgages was 13% (Source: Mortgage Bankers Association). The average 30-year fixed rate was 6.3% in 2022 (Source: Freddie Mac).
Also known as ARMs, adjustable-rate mortgages only account for under 10% of new mortgages. With an ARM, the interest rate fluctuates over the loan term based on market conditions. The rate and payment amount can go up or down at specified intervals. ARMs often start with lower “teaser” rates to entice borrowers.
ARMs appeal to borrowers who only plan to keep the mortgage for a few years. However, payment shock risk exists when rates rise. The ARM structure also makes budgeting difficult with fluctuating payments.
Common ARM terms include 3/1, 5/1, 7/1, and 10/1 ARMs where the first number represents the fixed period and the second number represents the adjustment interval. A 5/1 ARM has a fixed rate for 5 years which then adjusts annually.
Interest-only mortgages allow borrowers to only pay the monthly interest charges for a set period, typically 5-10 years. Payments are lower in the interest-only period because the loan balance is not amortizing. However, once the interest-only period ends, payments spike to account for both interest and principal.
This structure appeals to borrowers who expect their finances to improve. However, payment shock risk exists once principal payments begin. Interest-only mortgages fell out of favor after the 2008 financial crisis but have recently reemerged.
Reverse mortgages allow homeowners aged 62+ to convert home equity into cash without having to sell the property. The lender provides a lump sum, line of credit, or monthly payment based on home equity, age, and interest rates. Repayment is not due until the borrower dies, sells, or moves out.
These mortgages appeal to seniors who lack retirement income but have substantial home equity. However, closing costs and interest charges erode equity over time. Borrowers may owe more than the home’s value when sold.
A balloon mortgage offers very low payments for a set term, usually 5-7 years. However, at the end of the term, the entire mortgage balance becomes due as a final “balloon” payment. Borrowers must refinance or pay off the balance when the balloon matures.
This structure appeals to borrowers looking to minimize payments in the short-term. However, refinancing may become difficult, forcing the borrower to default. Rising interest rates also increase the risk of payment shock upon refinancing the balloon.
Jumbo mortgages exceed the conforming loan limits set by Fannie Mae and Freddie Mac, which in 2023 is $729,750 for single-family homes in most areas. Jumbos allow buyers to finance pricier homes but come with higher rates and stricter eligibility standards.
In 2022, jumbo loans accounted for around 7% of mortgages (Source: Mortgage Bankers Association). Jumbos appeal to affluent borrowers purchasing luxury real estate. However, jumbo borrowers often require excellent credit and stable income to qualify. Down payments of at least 20% are also common.
FHA loans are government-insured mortgages that require lower minimum credit scores and down payments compared to conventional loans. In 2022, FHA loans made up around 19% of all mortgages (Source: Mortgage Bankers Association).
The low down payment requirement of just 3.5% appeals to first-time homebuyers with limited funds saved. However, FHA borrowers must pay for mortgage insurance. FHA mortgage rates are also typically higher than rates for conventional loans.
Like FHA loans, VA loans are government mortgage programs that offer favorable terms to eligible borrowers. Specifically, VA loans assist military service members, veterans, and eligible spouses. VA loans accounted for 10% of all mortgages in 2022 (Source: Mortgage Bankers Association).
The ability to finance 100% of the home price with no down payment is the main perk. VA mortgages also come with competitive rates and can be assumed by qualified buyers upon sale. However, a VA funding fee must be paid to receive the benefits.
USDA loans help very low-income borrowers in suburban and rural areas purchase homes with no down payment and flexible credit standards. While limited in availability, USDA mortgages offer an affordable financing option for eligible buyers. Private mortgage insurance and application fees are not required.
As seen, multiple mortgage structures exist to accommodate different financial situations and goals. Choosing the optimal loan type involves analyzing your budget, time horizon, and risk tolerance. Consulting an experienced loan officer also helps determine the best mortgage product for your needs.
Selecting the ideal mortgage depends primarily on your financial situation, future plans, and risk appetite. Important factors to consider include:
Discussing these factors and loan options with an experienced lender helps determine whether a conventional, FHA, VA, USDA, jumbo or niche product mortgage best aligns with your situation. Pre-approval from multiple lenders also lets you compare rates and terms.
Each mortgage program carries unique advantages and drawbacks.
Fixed-rate mortgages provide predictable payments but offer less flexibility. You cannot pay down the principal faster without refinancing.
ARMs start with lower rates but carry payment shock risk when the rates adjust upward. Budgeting becomes difficult with fluctuating payments.
Interest-only mortgages offer lower initial payments but payments spike once principal repayment begins. There is also risk of payment shock upon recasting.
Reverse mortgages allow seniors to access home equity but reduce the estate value over time. High upfront costs also exist.
Balloon mortgages minimize payments short-term but require refinancing the balance when the balloon matures. Rising rates can make refinancing unaffordable.
Jumbo mortgages allow buyers to finance pricier homes but come with stricter eligibility standards and higher rates.
Government loans like FHA, VA and USDA products provide favorable terms but require mortgage insurance and fees. Rates may be higher as well.
Carefully weighing the advantages and disadvantages of each mortgage program based on your needs and goals allows for an informed financing decision.
Many factors impact the mortgage rate lenders offer. These include:
Credit score – Borrowers with higher scores get lower rates. Scores below 620 make approval difficult.
Down payment amount – Larger down payments signal less risk and may earn lower rates.
Debt-to-income ratio – The ratio of your monthly debt payments to income affects qualification. Ratios above 50% often lead to higher rates or rejection.
Loan type – Government and jumbo loans often get higher rates than conventional mortgages. Niche products like ARMs also have differentiated pricing.
Property type – Interest rates are higher for non-owner-occupied homes versus primary residences.
Market interest rates – Lenders base mortgage rates on 10-year Treasury yields and other macroeconomic factors.
Shopping multiple lenders helps discover the best rates your particular financial profile can qualify for. Comparing rates from online lenders, banks, credit unions and mortgage brokers provides market coverage.
The mortgage application process involves:
1. Getting pre-qualified – Lenders estimate your affordability using basic financial details. This helps target a appropriate loan amount when shopping.
2. Choosing a lender – Research interest rates, fees and reputation when selecting a lender. Get proposals from multiple sources.
3. Getting pre-approved – Providing pay stubs, tax returns and other documentation generates a pre-approval letter stating your eligibility for a specified loan amount.
4. Finding a home and making an offer – The pre-approval letter shows sellers you are qualified to finance the purchase.
5. Completing the full application – Final approval requires submitting required income, tax and asset documents. Underwriting examines details to confirm eligibility.
6. Locking your interest rate – Rates can fluctuate between pre-approval and closing. Locking “freezes” the rate at a cost.
7. Closing on the mortgage – Sign documents, pay closing costs and inspect the home one last time. Wire the down payment and receive the property keys!
Following these organized steps helps the mortgage process go smoothly from pre-qualification through final approval and closing.
Lenders assess the following factors when approving borrowers:
Meeting these criteria demonstrates you can safely manage the mortgage payment and related obligations.
Carefully reading the mortgage documents ensures you agree to the interest rate, duration and other key terms. These include:
Understanding obligations regarding late payments, prepayment and escrow funds ensures costs don’t surprise you down the road. Ask the lender to explain all mortgage terms.
Some common mortgage mistakes include:
Avoiding these common missteps helps ensure a smooth mortgage process without surprises down the road.
Several strategies exist to pay off your mortgage faster. These include:
Discuss the most cost-effective strategies for your situation with a loan officer. Their expertise can help identify options to become mortgage-free sooner.
The mortgage market offers many diverse products to finance a home purchase or refinance an existing loan. Comparing the rates, terms, requirements and costs helps identify the optimal mortgage structure for your financial needs and goals. Partnering with an experienced lender simplifies the process of qualifying for and securing a mortgage or refinance tailored specifically to your situation. With the right home loan in place, you can fully enjoy the many benefits of homeownership.