The purchase of a home is arguably the biggest financial decision you will make as an adult. With the average home price in Pierce County WA being well over the $500,000 threshold, most of us will need a mortgage loan to pay for it. It's a common assumption to assume that mortgage loans are a "one size fits all" deal. Everyone puts 20% down, signs the mortgage documents for a 30-year loan term, and begin to make those monthly payments. This is NOT true. As your resource for all things home, the Liz Keeps It Real Estate Team is here to help you understand the variety of mortgage loans available to consumers. Please note that there are many nuances with each of these loans, so it is best to discuss your personal situations with a mortgage loan expert. Our team can give you the names of local mortgage lenders, who can help you find the perfect loan for your perfect new home.
So without further ado, here is the hopeful homeowners guide to mortgage loans!!
Government backed loans:
Government backed loans have many "perks", but can be limiting in who can qualify for them. The most common mortgage loans that are backed by the Government, include VA loans, USDA loans, and FHA loans. VA loans are for those that have serviced in the U.S. military. These loans do have specific qualifications for which properties qualify for them, but do not require a downpayment. Another Government backed loan is the USDA. This is for single family homes purchased in specific "rural" areas. USDA loans have more flexible income (there is a max income cut off) & credit score limits, but you will pay for PMI/Private Mortgage Insurance (a monthly fee you pay with your mortgage). Lastly, is the FHA loan which have earned the nickname of the "First Time Homeowner Loan". There is good reason for this nickname. With down payment requirements far below the traditional 20% at just 3.5%, this helps individuals who don't have a large savings or another home to sell. FHA loans also have less strict credit and income requirements. There are some downsides. To have an FHA mortgage, you will pay the PMI for the life of the loan, you must occupy the home, and you can't use a FHA loan to purchase a condo.
Adjustable rate mortgage
Adjustable rate mortgages (or ARMs) are a type of variable rate mortgage. This means that the interest rate on the loan will change, as laid out in the mortgage loan terms. Homeowners with an ARM loan, will have their monthly payment increase as time goes on. However, since the initial payments are lower the borrower could qualify for a larger loan and therefore get a larger home. So the question is- why would anyone get one of these loans? This could be a good option for someone who doesn't expect to be in the home for more than a few years (so they would have a low mortgage payment, and would sell before the monthly payment increases). This could also be a good option for someone who expects their income to increase in the next few years. Lastly, this would be a good option for someone who plans to repay the loan quickly, and therefore save money with the lower initial interest rate.
A fixed rate mortgage is the exact opposite of an ARM. Borrowers will have the same monthly payment for the life of the loan. They are able to budget long term, without their mortgage payment being affected by interest rates & market conditions. This loan would be best for home owners who believe they will be in this home for the long haul. Downside of a fixed rate mortgage? If interest rates go down, these homeowners will continue to pay the higher interest rate they got when they signed for the loan. Tip, if interest rates drop a 1% or more than your rate---- refinance!
A conventional mortgage loan is any loan that is not backed by the government. However, there are many different types of this type of loan. For instance, conventional loans can have downpayment requirements as low as 3%! You will have to pay for PMI though, if you put less than 20% down. Conventional loans have much more flexibility in terms of the types of property they can be used to finance (example, vacation home, investment property, condo). However, conventional loans have stricter terms for borrower credit scores & debt-to-income ratios than other types of loans.
Last, but not least, is our jumbo loan. As their names imply, these are large loans that are not backed by the government. They have the strictest qualifying terms out of all of the loans, so only the most qualified homebuyers will qualify. What qualifies as a jumbo loan will vary by state to state, and even area to area. For instance, the 3 most expensive counties in Washington State (Pierce, King and Snohomish) have a jumbo loan threshold that starts at $977,501. Less expensive areas of the state, will have lower thresholds.