Mortgage Information

A mortgage is a loan that you obtain to close the gap between the cash you have for a down payment and the purchase price of the home you're looking to buy. There are two categories of mortgages, conventional and governmental. Conventional loans are through a bank or credit union; these are not insured nor guaranteed by the government. Governmental mortgages are FHA, VA or RHS loans.

FHA - Federal Housing Administration FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans have a limit which varies from one area of the country to another.
VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The guaranty allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. Lenders generally limit the maximum VA loan to $203,000. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan.
The Rural Housing Service (RHS) of the U.S. Dept. of Agriculture guarantees loans for rural residents with minimal closing costs and no downpayment.

Within these two categories there are two types of mortgages, and they differ in terms of how their interest rate is determined: fixed-rate mortgages and adjustable-rate mortgages.
• With a fixed-rate mortgage, your monthly mortgage payment amount does not change. No surprises, no uncertainty.
• Adjustable-rate mortgages (ARMs for short) have an interest rate that varies. The interest rate on an ARM stays low for a short period of time and then adjusts, which could be as frequently as every month.

With fixed rate mortgage (FRM) loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate offered; of course the monthly payment is higher. Interest rates also vary based on an individual’s credit score. The rate on a FRM is usually higher than that of an adjustable mortgage.

Most ARMs have an interest rate caps to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at one time. With most ARMs, the interest rate can adjust every month, every three or six months, once a year, every three years, or every five years. The adjusted rates are determined by a preset formula. Most ARMs offer an initial lower interest rate during the initial period of the loan, which could be one month or a year or more. It is also known as teaser rate.
The right type of mortgage chiefly depends on how long you plan on staying in the house and the amount of monthly payment you can comfortably afford.
If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider something other than a fixed rate mortgage. ARMs traditionally offer lower interest rates during the early years of the loan than fixed-rate loans. Two other types of mortgages to consider if you do not plan to stay in your home for more than 5-7 years are the Two-Step Mortgage or the Balloon Mortgage. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years and then a different rate beyond that time period. A Balloon Mortgage offers lower interest rates for shorter term financing, usually five or seven years; after that time you need to either pay off the loan or refinance. Because of a lower interest rate it is easier to qualify for these types of mortgages. However don't go with the ARM unless you can afford the maximum possible monthly payment. Generally, you can start to consider 15 or 30 year fixed rate mortgages if you plan to stay in your home for more than seven years.
Another expense to keep in mind when considering your mortgage is points. Points are up-front interest, and they cost you money. Lenders charge points as a way of being paid for the work and expense of processing and approving your mortgage. Each point represents 1% of the mortgage amount. Typically, the more points you pay the lower your mortgage rate.
When you buy a home, the points are tax-deductible -- you get to claim them as an itemized expense on Schedule A of your IRS Form 1040.