The mortgage world can be a confusing place. Every mortgage has variables that determine how much a borrower ends up paying, and technical jargon can make it tough to understand what you're getting into.
Most shoppers simply want a good deal on a loan. Making apples-to-apples comparisons can be difficult, but a little education can go a long way toward landing the right mortgage at a great price.
Sunshine Home Loans offers many tools to help you find the best mortgage. You can search for top mortgage rates or use an online mortgage calculator to weigh options and compare costs. But before you begin, review the different types of loans available today and the benefits of each type.
What is it? This mortgage combines a stable, fixed interest rate with a long loan term that helps create manageable payments for millions of American families. During the years leading up to the current mortgage crisis, many homebuyers strayed from this time-tested formula in search of exotic loans with lower interest costs. Today, many borrowers are returning to the 30-year fixed-rate fold.
Best for: Borrowers who plan to remain in their homes for a long time and/or who want the security of knowing their monthly payment will never change.
What is it? This mortgage typically offers lower interest rates than its 30-year fixed-rate counterpart because banks don't have to price in as much long-term inflation risk. Borrowers who purchase a 15-year fixed-rate mortgage must pay off the loan more quickly. But they also build equity faster than homeowners with 30-year mortgages.
Best for: Buyers of less expensive homes who hope to avoid a big chunk of interest costs by paying back the mortgage faster. This loan also appeals to homeowners seeking to refinance their mortgages without extending the term back out to 30 years.
What is it? Jumbo mortgage loans are 30-year fixed-rate loans too big to be bought and repackaged by mortgage giants Freddie Mac and Fannie Mae for resale to investors. Banks that issue jumbo mortgages have to hold onto the debt themselves, thus incurring more risk (which is compounded further by the large amount of money at stake). As a result, jumbo borrowers can expect not only a higher interest rate on their loans, but also more difficulty finding lenders.
Best for: Buyers of large, expensive or mid-range homes in areas where housing is more costly.
What is it? ARM stands for adjustable-rate mortgage. Unlike fixed-rate mortgages, these loans don't have a rate guaranteed to remain stable for the length of the term. The introductory rate on these loans, which lasts only for the first year, often are significantly lower than rates on fixed-rate loans. The term for these loans is typically 30 years. One year into the loan's term, the interest rate on this ARM (and the resulting payments) adjusts periodically based on a mortgage index such as Libor or COFI. In a falling-rate environment, that's a good thing, as it results in lower payments. However, if rates increase, you'll be stuck with higher payments.
Best for: Buyers who do not plan to stay in their homes very long and who are looking for lower borrowing costs. Also, borrowers with enough cushion in their income to cover higher payments should rates increase.
What is it? The 5/1 ARM is an adjustable-rate mortgage that has a fixed rate for five years. After that time period, the rate adjusts periodically. The term for these loans is typically 30 years. Like the 1-year ARM, borrowing costs are tied to a mortgage index such as Libor, or London Interbank Offered Rate, and COFI, or 11th District Cost of Funds. Buyers benefit from lower borrowing costs when interest rates fall, but feel the pain of higher payments when rates rise.
Best for: Buyers who intend to sell within five years and are looking to cut down on their mortgage costs. Also, borrowers with enough cushion in their income to cover higher payments should rates increase.
What is it? A reverse mortgage is a loan for senior homeowners that uses a portion of the home s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage. The FHA program was created in response to the rash of foreclosures and defaults that happened in 1930s; to provide mortgage lenders with adequate insurance; and to help stimulate the housing market by making loans accessible and affordable. Nowadays, FHA loans are very popular, especially with first-time home buyers.
Best for: Seniors 62+ who own their homes and are looking for supplemental income.
What is it? An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
Best for: Typically, FHA loans are a good fit for first-time buyers, those with small down payments and those with less-than-perfect credit. But anyone is eligible to apply.
What is it? A VA Home Loan allows qualified buyers the opportunity to purchase a home with no down payment. There are also no monthly mortgage insurance premiums to pay, limitations on buyer's closing costs, and an appraisal that informs the buyer of the property value. For most loans on new houses, construction is inspected at appropriate stages and a 1-year warranty is required from the builder. VA also performs personal loan servicing and offers financial counseling to help veterans having temporary financial difficulties.
Best for: Veterans, active duty service members, Reservists and National Guard members who served or currently serve on active duty.
What is it? If you are not behind on your mortgage payments but have been unable to get traditional refinancing because the value of your home has declined, you may be eligible to refinance through the Home Affordable Refinance Program, or HARP. This program is designed to for homeowners who are still current with their mortgage payments, but are looking to get a new, more affordable mortgage.
Best for: If you are a homeowner with a mortgage backed by government-owned Fannie Mae or Freddie Mac, this loan will allow you to reduce your mortgage payment significantly by refinancing at today s low interest rates, even if your home has lost value.
What is it? The Home Affordable Modification Program (HAMP) is designed to help financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term.
Best for: Unlike the HARP program, the HAMP program is specifically designed to help those homeowners who are in danger of losing their home to foreclosure.
What is it? A USDA loan (also called a Rural Development Loan) is a government insured home loan that allows you purchase a home with NO money down. USDA Loans offer 100% financing to qualified buyers, and allow for all closing costs to be either paid for by the seller or financed into the loan. USDA offers some the lowest rates of any loan, and you will always have a fixed interest rate.
Best for: A USDA Direct Loan is a great product for low-income first-time homebuyers in rural areas.
What is it? An FHA 203k loan is basically the same as a regular FHA loan, but with a twist. An FHA 203k loan permits home buyers to finance repair/improvement money into their mortgage to repair, improve or upgrade their home. With this loan option, home buyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser or home buyer preferences, such as energy efficient improvements, replacement of existing counter tops, appliances, floor coverings, etc.
There are two types of FHA 203k Loans: Standard/Rehab (minimum $5,000 up to FHA maximum loan amount) & the Streamline ($0 $35,000 up to FHA maximum loan amount.) The FHA 203k Rehab loan is more like a construction project, and the FHA Streamline 203k Loan is for more minor improvements.
Best for: Home buyers or homeowners looking to purchase or refinance a home that is in need of repairs or renovation. Often times, buyers who are looking to purchase short sale or bank-owned homes that have been foreclosed will choose this option.