Have questions about mortgages? Don't worry, we've got you covered. There are several options to help you out with your mortgage that not everyone knows about.
Trying to figure out just exactly how a mortgage works? Don’t feel bad, the average home buyer doesn’t either. From how big a down payment has to be, to why your interest rate isn’t as great as you’d hoped it would be, the whole process is filled with head-scratching questions. In order to make this process just a little bit easier, we've compiled some of the most common questions home buyers ask about mortgages, and have provided you with the answers.
So question.. Do I actually need to provide a 20% down payment?
Answer: Typically, no, a down payment is less than 20%, and if you don’t have 20%, there are plenty of ways to put down less and still get the house of your dreams. One option: a Federal Housing Administration Loan will allow you to put down as little as 3.5%, as long as you meet certain qualifications (AKA you have to have been employed for at least two years and have a minimum credit score of 500).
If you are an active or a retired military member, or a surviving spouse of a veteran, you can put 0% down with the help of a Veteran Affairs Loan.
Along with those options, some states and/or counties even offer loan programs that enable borrowers with low income to receive a down payment subsidy.
Okay, but why did I see an advertised mortgage interest rate offer that is lower than what I've been offered?
Answer: Disclaimers (typically an asterisk) which says this is the best possible rate. In order to get that interest rate though, you will need an exceptional credit score (750 or above), as well as a low loan-to-value ratio. So basically, you'd be making an even larger down payment, typically at least 40% of the home’s price.
So then, if your borrowing scenario is not that spectacular, (750 or higher credit score and a low loan-to-value ratio) then you’re considered more of a risk—and your interest rate will rise to reflect that. In addition to your credit score and loan-to-value ratio, other factors come into play, such as whether you're buying a condo, single-family house, etc. Bottom line: Read the fine print when evaluating your loan options. (Or really when you're researching anything at all).
Okay so my next question.. Is a 30-year fixed-rate loan really the best option?
Answer: The 30-year loan with a fixed interest rate is typically the first thing that comes to mind for most home buyers, however, there is no "one specific loan" that works for every single person. For example, take adjustable-rate mortgages. They typically get a bad rap, however, they work well in certain circumstances, (like if you plan to move soon, before the rates adjust). They may also work well for you if you can’t afford a home with a fixed-rate mortgage, since those interest rates are slightly higher.
Do you have enough cash to cover the bigger monthly bills? Then a 15-year loan might make more sense than a 30-year loan. Why? You'll end up paying way less in interest.
Do I need private mortgage insurance?
Answer: If you can’t afford to make a 20% down payment, then yes, you’ll have to pay private mortgage insurance. If you end up unable to pay your mortgage, then this is when your private mortgage insurance will kick in. Ultimately, your lender will lose money if you can't pay your mortgage. That's where PMI steps in. It pays the benefits to offset that loss. You can expect to pay about 0.3% to 1.15% of your home loan in private mortgage insurance. While this can seem like a large amount, it may make sense if you want to buy a home now rather than wait until you can afford a bigger down payment.
Another option? Have your lender cover the mortgage insurance. You’ll pay a higher interest rate, but it’s often cheaper than paying PMI yourself each month.
It is always up to you to decide what is more important to you.
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