What you Need to Know About Mortgages

What you Need to Know About Mortgages

Posted: December 20, 2022 in Achieving Financial Goals, Credit

Mortgages can be more complicated than people think, and we often expect young people to understand them without being told. At the basic level, a mortgage is a loan to purchase a home.

However, mortgages can be much more complicated than that. You pay your mortgage back over several years, and your home is considered collateral for the mortgage loan. You will make a monthly payment that includes part of the loan amount and interest, and in addition, it may include property taxes and homeowner's insurance. Until you have paid off 20%, you also have to pay Private Mortgage Insurance or PMI, which helps protect the lender.

If this all seems to be a little bit stacked against you, don't worry. Lenders will generally not lend you more than you can afford to pay. For most of us, a mortgage is the only way we can afford to buy a home. ProFed Credit Union is here to make picking the right mortgage simple.

Mortgage Rate Types

One important decision is whether to go with a fixed-rate mortgage or an adjustable-rate mortgage. With a fixed-rate mortgage, you agree to pay a certain percentage a year in interest, which stays that way for the life of the loan. With adjustable-rate, your interest varies over time.

The former is easier for budgeting as you know how much your payments will be each month. However, rates are generally lower to start with on adjustable-rate mortgages. In general, if you think you will stay in your home for a long time, you should pick a fixed-rate mortgage, but if you are planning on relocating after a few years, adjustable-rate may be better.

How Do Interest Rates Impact My Mortgage?

A lower interest rate is always better; even a small difference can save you thousands of dollars over the life of the loan. It's not, of course, always possible to time buying a home when federal interest rates are low, so you should always shop around to get the best interest rate you can.

Qualify for Other Types of Mortgages

Most mortgages are conventional loans. These are available to borrowers with good to excellent credit and can make a decent-sized down payment. However, not everyone meets those qualifications. 

Alternative loans are another option for borrowers. There are six main types of alternative loans:

1. 100% Conventional Loan. 100% conventional loans can be fixed or variable interest rate, with no down payment. This product is geared towards qualified applicants who have limited resources for a down payment. The interest rate and mortgage insurance premiums may be slighterly higher. Also, a minimum credit score and two month cash reserve are required.
2. First-Time Homebuyer Loans.  First-time homebuyer loans are for borrowers who have never owned a home or have not owned a home in the last three years. Both variable and adjustable rate mortgages are available. ProFed's First-Time Homebuyer loan offers discounted origination fees and as little as 3% downpayment requirement.
3. FHA Loans. FHA loans are backed by the Federal Housing Administration and are intended for prospective homebuyers who don't qualify for a conventional loan. Depending on your credit score, you might have a down payment as low as 3.5%. However, you will have to pay PMI premiums, possibly for the life of the loan. FHA loans are particularly good for first-time buyers who don't already have equity in an existing home.
4. VA Loans. VA loans are only offered to eligible veterans, current service members, and surviving spouses. However, if you fall into one of these categories, you can get an excellent deal, including no down payment and not having to pay PMI because the Department of Veterans Affairs covers it for you.
5. USDA Loans. If you live in a rural area, you might look into a USDA loan. These are intended for low- and middle-income borrowers and help people out in places where rental properties tend to be rare. These loans don't require a down payment but have substantial upfront fees and do require insurance.
6. ARM Loans. Adjustable-Rate Mortgages (ARMs) are fixed for a certain duration typically 5 to 7 years and then will adjust annually in relation to the current market. An ARM loan payment will likely change, but initially will provide a lower rate and payment compared to a fix rate loan.

If you qualify, these alternative loans are worth looking into; a ProFed mortgage loan officer can advise on what mortgage type is right for your situation.

Figuring out the right mortgage takes research, patience, and an understanding of the home buying process. If you are looking into buying a home, or if you have a home and need cash, contact us. One of the many great features of a ProFed mortgage that sets us apart from the rest is that we service all of our mortgages for the lifetime of the loan which means you'll always have a local team you can reach out to for any questions or concerns you have regarding your mortgage. Reach out today and we can help you with all of your mortgage questions.

Sources:

EVERFI, Inc. “Mortgages.” ProFed Credit Union Financial Education Powered by EVERFI, 2021, profedcu.everfi-next.net/student/dashboard/profed/owning-a-home/1672#mortgages/what-other-options-do-i-have-for-taking-out-a-home-loan/page-1.

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