Minneapolis home buyers have more financing options available to them than ever before. From traditional mortgages including conventional and FHA, to adjustable-rate and hybrid loans, there are financing packages designed to meet needs of just about every potential home buyer today.
While all of the different choices may seem confusing at first, the end goal is quite simple: Find a loan that fits your future plans and financial situation as best you can. Although this article discusses some of the more common loan types, you should always consult in a professional lender before deciding on the loan that you feel fits your needs.
1. Fixed Rate Mortgages
As the name says, a fixed-rate mortgage rate stays the same over the course of the loan. The interest rate will not change and your monthly payment will stay relatively consistent excluding outside factors such as homeowners insurance, mortgage insurance and taxes. Traditionally, we have seen fixed rate mortgages as the most common loan type among homeowners because this type of loan is the easiest to budget for and helps protect against inflation. Fixed rate mortgages commonly come in 30- year and 15-year terms but there can be situations where this may change.
2. Adjustable-rate Mortgages (ARM)
Adjustable-rate Mortgages differ from fixed rate mortgages in that the rate of the loan can change at any time due to inflation. This change can happen because the interest rate of the loan is tied to an index such as Treasury Securities that can rise or fall over time. In order to protect against large increases ARM loans usually have some sort of cap on them from rising above a certain amount between adjustments. For example, no more than 2% per year. They also a lot of times have a ceiling which may be a number like 6%, this protects the loans interest from moving to high period. With these protections and low introductory rates, ARM loans have become a very popular alternative for the home buyer outside of the fixed rate mortgage.
3. Hybrid Loans
Hybrid loans combine features of both fixed rate mortgages and adjustable rate mortgages. Typically a hybrid loan may start at a fixed rate for a certain length of time and then convert to a ARM mortgage. Make sure you check with your lender how much this increase is as some hybrid loans do not have interest rate caps. Other hybrid loans could start with a fixed interest rate for a number of years then jump to a higher fixed interest rate for the next number of years and so on.
4. Balloon Payments
A balloon payment is a loan that has a large, final payment due at the end of the loan. For example, there are currently fixed-rate loans which require homeowners to make payments based on a 30-year loan, even though the entire balance of the loan may be due (the balloon payment) after 7 or 8 years. Similar to Hybrid Loans, balloon loans can be a very attractive alternative to a homebuyer who knows they are not going to stay in their home for a long period of time.
5. Time as A Factor in Your Loan Choice
Time should definitely be a factor in what loan option you choose as some loans are structured to benefit a homeowner who plans to stay in their home for a short period of time while others benefit the homeowner who plans to live in their home for a long time. Lets take a look at a scenario where you plan to stay in your house for 10 years, in this case, a traditional fixed-rate mortgage may be your best bet as you will not have to deal with rate fluctuations as seen in an ARM or a large sum owed after a certain period of time as seen in a balloon loan. But if you plan on owning a home for a very short period, say maybe 3 or less years then the lower introductory rate you would receive with an adjustable-rate mortgage may make the most financial sense. In general we see that ARMs typically have the lowest introductory interest rates to get started, followed by hybrid loans, and then traditional fixed-rate mortgages.
6. FHA vs VA loans
FHA and VA loans are US government loan programs one being the Federal Housing Authority (FHA) and Department of Veterans Affairs (VA). These types of programs are designed to promote home ownership for families and people who might not be able to qualify for a standard conventional loan. Both FHA and VA loans have lower qualifying ratios than conventional loans, and often require smaller or no down payments. In the past, FHA and VA loans have had higher interest rates by up to an entire point. Check with your MN lender to see where rates are at as FHA loans are becoming a very popular alternative to the conventional loan. FHA loans in some cases may be assumable meaning that you can pass the interest rate on to the next buyer.
7. Conventional Loans
A conventional loan is simply a loan offered by a traditional private lender. These loans may be fixed-rate, adjustable, hybrid or other types such as balloon. Conventional loans have many different types of options available and typically have a larger down payment such as 5% as compared to around 3% for FHA loans. While conventional loans typically are harder to qualify for than government-backed loans, they often require less paperwork and typically do not have a maximum allowable amount. One advantage to the conventional loan is that if you plan to do work to your house and make improvements, you are able to get a re-appraisal and if you increase your equity you might be able to eliminate the need to pay Mortgage Insurance (PMI).