Different Types of Home Loans

When purchasing or building a home, investors and individuals must carefully consider the range of available loan options. Mortgage products each have advantages and disadvantages—some loans have smaller fees and lower interest rates while requiring large down payments, whereas others have small upfront fees but will cost thousands more throughout its life. There are loans for expensive properties, executive homes, and Veteran-specific home loans. If you’re even casually thinking about purchasing property, it is essential to review your loan options. This will allow you to understand the real cost of your mortgage—both upfront and over time.

 

Department of Veterans Affairs (VA) Home Loans

VA loans are available to veterans who have little cash but a good credit score. There are no strict limits on credit eligibility or debt-to-income ratios for borrowers, and veterans will need to obtain a Certificate of Eligibility through their lenders or the VA Loan Eligibility Center. Most underwriting items are left to the discretion of the lender, meaning there may be some variability in these loans. This is an excellent financing option for veterans, but those considering this type of loan should continue to consider other options. If you have cash and great credit, you will likely be able to find a better rate with a conventional loan.

 

Federal Housing Administration (FHA) Loans

An FHA loan is a great choice for those new to the housing market who might have few funds and a lot of debt. An FHA loan is the most forgiving of credit problems and low credit scores. Borrowers can finance up to 96.5% of the cost of their home, and the fees lenders can collect are strictly limited. An FHA loan requires both a down payment and a monthly loan insurance premium payment. Borrowers will also need mortgage insurance, which will add to the overall costs of over the life of the loan. However, the upfront portion can be financed into the loan, lowering the initial borrowing cost.

 

Conventional Loans

These loans necessitate higher down payments, better credit, and a lower income-to-debt ratio than FHA loans. Borrowers with excellent credit may only have to pay 5% down, but historically, borrowers have needed to pay 20% down. Conventional loans aren’t insured, but homeowners with this type of financing will pay a monthly premium based on the loan amount and credit score. Mortgage insurance may be canceled after two years if the home value has increased to provide 20% equity. However, if you have bad credit and several monthly debt payments, this may not be the loan option for you.

 

United States Department of Agriculture (USDA) Loans

USDA loans provide the best deal of all available mortgage products. Unfortunately, not everybody lives in an area qualifying for a USDA loan. Rates are set by lenders, but they are low and do not always require a down payment. However, there are several qualifying characteristics borrowers must have. Their income cannot exceed 115% of the median income for the area, and the home must be in an area targeted for rural development—often very out-of-the-way places that may not have good infrastructure. Finally, the home must meet USDA’s exacting standards, which can be difficult. However, if you find that you qualify for this type of loan, it is undoubtedly the best choice for your money.

 

Jumbo Loans

Jumbo loans are what you might expect—jumbo. These loans are used to purchase mansions and estates, which often exceed the borrowable amount through Fannie Mae or Freddie Mac. However, qualifying for this type of loan can be very difficult. A borrower’s credit score must be 700 or better, and the down payments are between 20% and 30%, which is meant to prove the borrower’s high income. There is no insurance for this type of mortgage, so lenders are often hesitant about providing this type of funding.

Mortgage choices should consider more than down payment and interest. Before making any decisions, utilize a mortgage calculator to determine if any of these choices is sustainable. Additionally, borrowers should understand that mortgage rates have been raising steadily for the past several months. Rates are rending in the high 4% range, and any rate under 6% is considered good, historically. However, both governmental and consumer behavior is only going to drive mortgage rates up. If you’re strongly considering purchasing a home soon, do it now—your rates will be lower, and your loan will accrue less interest over its lifetime, potentially saving you thousands of dollars.

 

 

Refinancing a Home to Buy a Second Property

We’ve all heard the saying: “Real estate is an investment.” Rather than throwing money away on rent, homeowners are able to pay down the cost of their houses through mortgages, which go directly into the property’s ownership. Similarly, real estate assets usually increase in value over time, allowing investors and homeowners to make money on strategically-purchased properties. Few people, however, understand how they can use their current homes to purchase second homes. As with most investments, real estate allows homeowners to utilize lines of credit. In refinancing your home, you can fund children’s educations, other large-scale investments, and second homes. Home equity, as realized through a refinanced home, is one of the best ways to expand your investment.

In simple terms, home equity is the market value of a homeowner’s unencumbered property interest. This number is the difference between the home’s fair market value, as determined by an appraisal, and the outstanding balance of all liens on the property. Equity increases as the debtor, the homeowner, makes payments toward the mortgage balance. Equity will also increase as the property value appreciates. Homeowners may acquire equity from their down payment and the principal portion of any payments made against the mortgage, as well as from property value increases. This line of credit is often used as collateral for a home equity loan or home equity line of credit, also known as HELOC. This financing is provided by a lender who agrees to provide credit using the home itself as insurance.

 

Home Equity Lines of Credit

HELOC is an excellent financial tool. Homeowners can receive a line of credit for up to 90% of the appraised value with no closing costs. The appraisal itself is often the only out-of-pocket cost, and no reserves are necessary. The best pricing is awarded to those with credit scores over 740, but HELOC is available to most individuals with credit scores over 700. The interest rate is often significantly lower than most loans, starting at 3.75% for the first six months and dropping to the prime rate for the remaining repayment period. Users can submit interest-only payments for the first ten years, after which they will pay the principal plus interest for the last twenty years. The HELOC must remain open for three years, but the balance can remain $0 if you have utilized all funds.

Utilizing home equity or HELOC can be a scary experience for homeowners. In most cases, a home is a consumer’s most valuable asset, and failure to repay a HELOC or home equity loans can result in foreclosure. In fact, HELOC abuse is often cited as a major cause of the subprime mortgage crisis in 2007. However, the money available through this type of refinancing is generous, and lenders are often more willing to provide these funds than other types of loans—using a home as collateral is meant to guarantee prompt repayment. If you are looking for ways to finance the purchase of a second home—or, perhaps, a remodel, education, or large medical bills—HELOC and home equity loans should be carefully and strategically considered.

 

Home Mortgage Interest Rate Forecasts

Mortgage interest trends are an essential factor to consider when deciding the type of loan you want to finance your new home. Rates have been trending upward in recent months, and the next few years will be no exception. Below, we have included our forecasts for home mortgage interest rates—both short-term and long-term. If you want to mortgage a home, do so now; rates are expected to rise steeply for the foreseeable future.

 

Short-Term Rate Forecasts

Forecasting the interest rate in the short-term involves a lot less uncertainty.  Comparing one recent forecast, the average interest rate for July of 2018 is currently 4.53%. Anything under 6% is considered “good,” meaning borrowers are still reaping the benefits of relatively low interest rates. However, if you are planning to lock into a fixed-rate mortgage in the next year, do so very soon. Current projections place September and October of 2018 as the lowest rates for the next twelve months—4.45% and 4.46%, respectively. After that brief lull, rates are expected to shoot up, hitting above the 5% mark for the first time in March of 2019. The Federal Reserve is continuing to raise its benchmark rate, which will continue to raise interest rates across the housing market. Currently, mortgage rates are higher than they have been since 2011, but average homes were around $100,000 cheaper seven years ago. If you’re planning to purchase a mortgage, do your research and see what you can find with a stable interest rate. Then, cash in ASAP.

 

Long-Term Rate Forecasts

Though long-term mortgage interest rates are more difficult to forecast, figures are currently available through 2022. In a thirty-year mortgage, a four-year forecast is hardly helpful. However, the general trend is enough to inform and educate potential borrowers on the affordability of their loans. As mentioned, the average rate for July of 2018 is 4.53%. Over the next four years, that will increase to 5.44% (July 2019), 6.82% (July 2020), 7.00% (July 2021), and 7.59% (July 2022). These increases are intimidating but should be carefully considered prior to making any borrowing plans. For more detailed, month-to-month projections, click here.

Long-term mortgages and insurance rates come with a lot of uncertainty. Currently, rates are projected to increase steadily for the foreseeable future. If you’re planning to purchase a fixed-rate mortgage, do so now—rates will only continue to rise. Additionally, those with variable rates should expect to see their monthly payments increase with rate changes. Fixed-rate mortgages are influenced by what’s happening in the bond market, which has remained relatively stable. Variable-rate mortgages use the prime rate as a base, resulting in historically cheaper rates than with short-term fixed-rate mortgage. However, these long-term dramatic increases mean larger payments over the life of the loan. If you are currently torn between a fixed- and a variable-rate mortgage, the fixed option is, inevitably, the safer option. Interest rates are expected to hit 8% in the next four years—nearly double the current rate.