You’re looking to buy a house. But how do you make sure it’s the right one for you?
What if your dream home is out of your current budget? Should you limit your choices with the money you have?
Who pays for a house in cash anyway? Unless you can afford it, it makes more sense to pay for it while you’re living there.
With a mortgage loan, you can buy more than what you can afford. Or at least get more time to make the payment.
These loans benefit lenders long term as long as you’re a responsible buyer. So if you have the best credit score, getting this loan can save money.
Renting isn’t efficient, and not everybody walks with 100Ks in their pockets. Mortgages are flexible and the most popular way to finance a home.
Should You Get A House With A Mortgage?
Most people see it as the biggest purchase decision they’ll make in their lives. If that’s true, wouldn’t you want to make sure you made a good investment?
You may want to buy for many reasons:
- You don’t need to worry about a landlord’s permission to make changes
- If there are water, heating, or electricity issues, you’re stuck with them (in a rented property)
- Renting is financially inefficient compared to owning/reselling
- You can add rooms, resize, and repurpose your space at will
- You can easily pass the home onto other familiars. If anything happens to you, the family might still live there regardless of payments.
When buying, you can choose how much to pay and for how long. More time suggests lower payments but interest increases. And unless you get a fixed-rate loan, more time allows for economic uncertainty. Which is a double-edged weapon.
There’s probably a payment plan that’s more efficient than the traditional one. But nobody told you. Here, you’ll find a dozen mortgage variations, and we’ll explain which one is the best for each person.
Types Of Mortgage Loans
#1 Fixed-Rate Mortgage (15 & 30 years)
Depending on what you can afford, you make a down payment of 3-20% (sometimes 0%). For the rest, most lenders offer 15 to 30-year plans. For that time, you’ll be paying a minimum every month plus interest.
Even though it doesn’t vary, you might have to make bigger payments upfront. Lenders use the first few years of the mortgage to cover interest rates.
- Goal: To afford more properties by lowering monthly payments.
- Pro: Whether you chose 15 or 30-year plans, you have more than enough time to pay. Because it’s a fixed rate, you can get out of debt faster by paying more in advance. You can pay what you want anytime as long as it’s more than the minimum.
- Con: Lenders may set interest rates a bit higher to assess risk. Although a variable rate might be risky, you’ll never be able to lower your rate. Some lenders may have pre-payment penalties.
- Who: People who prefer lower monthly payments will go with 30-year plans. If you want to build equity and reduce your interest rate, 15-year plans are the second recommended choice. Even if one plan is 0.5% more expensive than the other, the wrong fixed mortgage could cost you more than twice the interest (sometimes over $100K).
- Conditions: There aren’t any credit requirements. If you have a better score, you’ll get better rates.
#2 Adjustable-Rate Mortgage
You start your loan with a fixed initial rate for 5-10 years. After that time, interest rates will adjust every year.
Some lenders may use lower rates at first to attract borrowers. Years later, they will likely go up.
- Goal: To lower the interest rate of the mortgage.
- Pro: **If you believe rates will go down, you’ll save thousands on interest.
- Con: If rates go against your prediction, you’ll be overpaying. That wouldn’t have happened with a fixed-rate mortgage.
- Who: If you expect rates to lower, adjustable is better than fixed. People who don’t want a mortgage for a long time will prefer this option (e.g., 15-year plans).
- Conditions: It’s easier to qualify for ARMs than for FRMs (fixed-rate). In case interest lowers, your monthly payments will be less than an FRM.
#3 Interest-Only Mortgage
For a set period, you only pay for the principal, the interest on the amount borrowed. It does NOT pay off the loan.
- Goal: To keep costs low, free up cash-flow, and afford more properties.
- Pro: Lower monthly payments during the initial period. If you earn more before it ends, you could use that mortgage loan to apply for more valuable properties.
- Con: After decades of payments, interest-only becomes one of the most expensive alternatives. You can’t get any equity with this loan.
- Who: People with rising income may not intend to live in the same property forever. Interest-only resembles refinancing, and borrowers can pay without being tied up to the home.
- Conditions: You must prove your lender that your yearly income is more than enough to repay.
#4 Reverse Mortgage
The lender sends you money every month, which adds to your loan balance. You don’t make any payments unless you stop living there or sell the property. In that case, the sale would cover most of that debt.
- Goal: Convert your home equity into cash without paying more or losing the ownership.
- Pro: You can’t lose your home due to missing payments because you don’t make any.
- Con: You still owe all the cash advances plus interest.
- Who: Seniors who want to use their home equity as a stream of income.
- Owners have to be, at least, 62 years old
- It must be your main residence
- You have to pay off any property debt you had before the reverse mortgage
Before you make a decision, learn the downside Of A Reverse Mortgage and Refinancing.
#5 VA Mortgage
Private lenders offer $0 down-financing because the VA (Veteran Affairs department) backs a portion of it. It works both for buying a residence or refinancing.
- Goal: To get better loan terms as a service member.
- Pro: You make no down payments. Lenders allow you to qualify with a debt-to-income ratio of up to 41%.
- Con: You can’t use VA loans for income properties. It must be your primary residence. The partial ammount VA is rarely more than 25%.
- If you served 90 consecutive days of active service during wartime, OR
- If you served 181 days of active service during peacetime, OR
- If you have 6 years of service in the National Guard or Reserves, OR
- If you are the spouse of a service member who has died in the line of duty or as a result of a service-related disability.
- Conditions: You need to pay a fee to fund the VA loan, which can be 0.5% to 3.3% of the borrowed amount.
It’s a zero down payment mortgage with low interest rates for rural and suburban homebuyers.
- Goal: To help rural Americans afford a house with low rates and no down-financing.
- Pro: No down payments nor reserves required. No pre-payment penalty. You can even qualify with a fair FICO score.
- Con: Restrictions and income limits change by state. If you pay little or nothing upfront, you’ll need to cover mortgage fees.
- Who: Buyers looking for sub-urban properties who qualify with their income bracket.
- U.S. citizenship (or permanent residency)
- At least, 24 months of Dependable income
- A plan where monthly payments are less than 29% of your income.
#7 FHA Mortgages
The Federal Housing Administration can cover construction related expenses: land, materials, fees. Once you qualify, you would make monthly payments as you’d do with a traditional mortgage.
- Goal: To make mortgage loans accessible for low-credit applicants
- Pro: Borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.
- Con: Borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.
- Who: Low-credit score borrowers who can’t afford large down payments.
- Steady employment/income history
- You must pay, at least, 3.5% to qualify
- Your loan amount shouldn’t exceed the FHA limits
- It requires a minimum credit score of 500. But if it’s below 580, it requires a 10% down payment.
Mortgage: To Borrow Or Not To Borrow?
Now that you know what types are there, it’s your turn to find out which one you need. What matters is that you make the right decision for your situation. You don’t need to take a traditional mortgage if you find better options.
Here’s what you should know before getting this loan:
- After X years, you will have paid MORE than what you borrowed
- Mortgage interest rates can increase. They change all the time unless you get a fixed-rate plan
- If you want to break even, you’re hoping for the housing market to favor you long-term
- If you can’t keep paying every month, you could lose your home
- You have to cover closing costs, escrow, and a ton of fees you wouldn’t do if you paid in cash. These expenses make an extra ~5% of the house value.
- Refinancing is expensive. You spend the first few years covering most of the interest. Years later, if you can’t pay every month and refinance the loan, you’ll have to pay the interest again.
We all understand the role of emotions here. The question is: do you accept overpaying later? Since mortgages cost you money, you’d better make sure that house is a good investment.
If you have a lot of room to grow in your career, that may mean increased revenue. What if you waited until you could afford a larger down payment, if not the full sum? In the meantime, you could find better properties.
Mortgages are attractive because borrowers become the owners by paying a tiny fraction. But is it really safe, knowing they may repossess the home if you miss payments? Only you know what risks you can tolerate.
In any case, you can come to your mortgage lender and find a solution. It’s also in their interest to help you keep the property. But mind that any repayment plans may involve more financial obstacles long-term. Such as higher rates.
Whatever you choose, learn to recognize any potentially unfolding foreclosure scams as well.