Yes, mortgage rates are on their way up. The first minor adjustment has just gone into effect, with little or no consequence to current home buyers.
These 4 vital mortgage facts for home buyers will help make your mortgage choice easier. And once you feel secure about your finances, you’ll find that the home buying process is far less stressful.
1 – Short term or long term mortgage?
If the grand scheme of home buying, a 30 year mortgage is the most common. Most people prefer it is because it allows the lowest payment per month. Your mortgage expert and your accountant may suggest this one because the rate is the most affordable over a long term. As your income rises over the years, the monthly payment does not. Therefore, this lower payment option has a great deal of appeal.
As low as the 30 year rate may be, the 15 year mortgage comes with an even lower interest rate. This allows you to increase your equity in the house and pay off your mortgage faster. However the monthly payment for the 15 year is considerably higher. For example, on a $200,000 loan at 5%, your 15 year payment comes to 1581.99 per month versus 1083.9 per month for a 30 year.
So, while you can afford more house with a 30 year loan – because payments are lower – you can own your home much faster – and perhaps feel more financially secure – with a 15 year loan.
2 – Should I be adjustable or just get myself a fixed rate?
According to Preston Ware of the Mortgage Firm, you’re best off with a fixed rate mortgage if you’re planning to spend more than 5 years in your new home. While Americans tend to move several times during the course of their lives, changes in the economy show families staying put longer than they used to. So the 7 year itch has devolved into 11 and 15 year stretches for more and more people.
If you’re going to carry mortgage debt, it’s best to keep it as low as possible for as long as possible. That means a 15 or 30 year fixed mortgage, where you know what you’ll be paying on day 1 and it never changes.
Adjustable rate mortgages, on the other hand, do exactly what their name implies: they adjust, and usually upward, after 3 or 5 years. So while you may start with a slightly lower rate in year one, by year four or year six you may find you’re well above the 30 year fixed interest rate.
That means you’ll be paying interest at a rising rate that constantly makes it harder to budget for your family’s monthly needs. So unless you’re planning to refinance – and there’s no telling where rates will be in 5 years – or you know you’ll be moving within a couple of years, it is best to avoid adjustable rate mortgages.
3 – What is PMI and do I have to pay it forever?
Whether you have an FHA mortgage (Federal Housing Administration) or a Fannie Mae mortgage, (Federal National Mortgage Association), you will be obligated to pay PMI (private mortgage insurance) if your down payment is less than 20%.
If you are able to put down 20% or more, then PMI is a non-issue. However, since most people don’t have that much cash to lay out for a house, PMI is a reality for the majority of home buyers.
With an FHA mortgage, you put down 3.5% of the home’s value up front and the bank lends you the remaining 95.5%. Because these loans are government guaranteed, banks are usually more flexible on terms for borrowers.
With the FHA mortgage, the PMI, which has just been reduced from 1.35% to 0.85% of the loan balance, remains in effect for the full 30 year term of the loan. The only way to eliminate that payment is to refinance the loan down the road, or to sell the house.
With a Fannie Mae loan, down payments may now be as low as 3%, though loan terms may be a bit tougher (680 credit score versus a 620 for an FHA). However, this toughness may be easing.
A recent statement from Fannie Mae says it will be using what is called “trended data.” While there was no exact definition given, this appears to mean that credit standards may broaden for borrowers. TransUnion suggests this will increase the number of prime borrowers by up to 9%.
Even better, with the Fannie Mae loan, if you request it, your PMI will be eliminated when your equity in the home reaches 20%. This typically takes about 10 years.
If you don’t put in this request, the PMI is automatically terminated when your equity reaches 22% of the home’s value.
In simple arithmetic terms, on a loan of $250,000 at current interest rates, you will pay about $15,000 in PMI to your Fannie Mae lender, and you’ll finish in about 10 years.
However, on that same amount and interest rate, your PMI payments will come in at close to $30,000 over the 30 year life of your FHA loan.
4 – Is no money down for real?
If you have served in our nation’s armed forces for at least 90 days during wartime and at least 181 days during peacetime, you may be eligible for a no-money-down VA (Veteran’s Administration) loan. These loans are guaranteed by the US government, so there is no PMI (private mortgage insurance) requirement.
There are also 100% loans occasionally available from the USDA (United States Department of Agriculture). However, unless the home you are planning to purchase is in a rural area that is at least two hours away from the nearest Publix supermarket, count on applying for a loan with a down payment attached to it.
Need a mortgage? Call your mortgage expert
For a full education in what mortgages are and are not, and what you will need to do to obtain one, call your mortgage banker. If you’re serious about buying a home using a mortgage, bring your financial information to your meeting and ask for a pre-approval letter.
In today’s very tight housing market, sellers will not look at your offer unless that pre-approval letter is attached.
Looking for a new home? Call us today.
Marc Jablon, the Jablon Team
New Harbor Realty