Purchasing a home is likely the largest financial obligation that you might undertake in your life. It’s critical to evaluate mortgage options based on your specific situation and make a choice that aligns with your needs. Navigating the home mortgage landscape can be intimidating. You need to know what options are available to you.
There are quite a few types of mortgage structures and offerings. Selecting the best mortgage for you requires consideration of your personal finances. We explore many of the common options here.
Fixed Rate Mortgages
A fixed rate mortgage has the same interest rate for the entire duration of the loan. Fixed rate mortgages are typically structured with either 15-year or 30-year term periods. A 30-year fixed rate mortgage will generally have a slightly higher interest rate, but the monthly payment is lower because payments are stretched out over a longer timeframe. Fixed rate mortgages are generally a good choice if you plan to be, or might be, in a home for an extended period. They provide you with clarity of guaranteed payments for the entire loan term.
Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage (ARM) has an introductory period with a fixed interest rate, but the interest rate changes when the period expires. The introductory term is generally 5, 7, or 10 years. To protect the borrower, ARMs often have rate caps that govern how much the interest rate can change in a specific period or throughout the duration of the loan. ARMs may be a good choice if you do not plan to be in a home for a long time (perhaps only a few years) as the introductory period interest rate is often less than fixed rate loans. One critical downside to ARMs is the interest rate might increase significantly after the guaranteed timeframe. The result is that the borrower could be burdened by much higher mortgage costs.
Interest-Only Mortgages
Interest-only mortgage payments are limited to interest only (and no principal payments) as the name connotes. These loans allow the borrower to make interest-only payments for an initial period, generally 3, 5, or 10 years. This can be attractive in an environment where home prices or interest rates have risen rapidly, either of which significantly increase monthly mortgage costs. Paying interest only for the initial period can help when cash flow may not adequately support interest and principal payments. However, it is important to remember that you will typically have to pay both interest and principal after the initial period. This means that while your mortgage payment might begin low, it could rise significantly in the future. If you are considering this option, you generally want to have a very reliable income that can cover future principal and interest payments when the introductory period ends, unless you refinance earlier.
Veterans Affairs (VA) Loans
VA loans frequently offer lower interest rates, but they are only offered to active and former military service members. VA loans are administered and backed by the Department of Veteran Affairs and have more lenient qualification standards, especially when it comes to the down payment required to receive a loan. VA loans allow active and former service members to finance as much as 100% of the cost of the home. This can be an especially attractive option for those who qualify based on their service and might not want or be able to make a significant down payment. VA loans typically offer competitive interest rates. While VA loans are often attractive, there can be a couple of downsides to consider. VA loans might include a funding fee. Additionally, small, or even zero down payments mean you have no immediate equity in the home, potentially placing you at risk.
Federal Housing Administration (FHA) Loans
FHA loans are designed for homebuyers who may not have the ability to fund a significant down payment and/or do not have a high enough credit score to qualify for other options. These loans are backed by the FHA and tend to be especially attractive to younger or first-time homebuyers as they help borrowers with lower credit scores or those making lower down payments. However, this flexibility comes with a few downsides. FHA loans often require an upfront insurance premium which varies based on the amount of your loan. Additionally, they frequently require ongoing mortgage insurance which increases your payment costs.
This list covers the most widely utilized mortgage loan options, but it is not exhaustive. Speaking with your financial advisor or a qualified mortgage lender is important to determine what might be best for you. SageVest Wealth Management works with clients on housing related considerations as a meaningful aspect of their comprehensive wealth. We invite you to contact us.
