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Collins Community Credit Union

How To Choose The Best Mortgage For You

Buying a home is an exciting moment, but all the terminology and the stacks of paperwork are not as fun to sift through as, say, paint swatches and tile samples. Before purchasing a new or new-to-you house, it is vital to understand the different mortgage options you have. A mortgage is a loan used to finance a property, and there are several types available for homebuyers.

Published on May 07, 2020

Conventional (Fixed-Rate)

This is a basic mortgage ideal for borrowers with strong credit (at least 620) and stable income and employment history. It can be used for a primary home, secondary home, or investment property and features lower overall borrowing costs and down-payments as little as three percent. A conventional loan does require a debt-to-income ratio of no more than 45% to 50% and sometimes features slightly-higher interest rates. However, homeowners who opt for this loan type can ask their lender to cancel the PMI ? which, by the way, stands for private mortgage insurance ? once the homeowner has achieved 20% equity. Loan terms for this mortgage type range from ten years to 30 years.

Jumbo

This is a conventional loan with non-conforming loan limits, which means the price exceeds federal loan limits. Commonly found in higher-cost areas, this loan type has a limit of around $700,000 and requires extensive documentation to qualify. A jumbo loan allows homebuyers to borrow more money to buy a home, but it does require a credit score of at least 700 and proof of significant assets in cash or savings accounts.

Adjustable-Rate Mortgage (ARM)

Unlike a fixed-rate loan, an ARM features interest rates that fluctuate based on market conditions. While this loan type requires some risk, its advantages include starting the loan with a fixed interest rate and saving a substantial amount of money on interest payments over the life of the loan. An ARM loan does have its drawbacks: monthly mortgage rates could suddenly become unaffordable, causing loan default, or the homeowner may have trouble refinancing or selling the loan if home values fall.

Balloon

Featuring lower interest rates than a conventional or ARM loan, this loan type requires homebuyers to pay off their homes in a short period, usually between five and seven years. With a balloon loan, homebuyers make regular monthly payments for five to seven years, and then the remaining balance of the loan comes due. While this loan type does save money over time, it is not feasible for most homebuyers in the United States.

Government-Issued

There are three government agencies that back mortgages: Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA). An FHA and USDA loan allows moderate-income to low-income borrowers with average or poor credit to buy a home, sometimes without a down payment. However, there are some eligibility requirements, and certain conditions do apply. For members of the United States military (both active duty and veterans), a VA loan provides low-interest mortgages that do not require down payments or PMI.

If you have questions about mortgage loans, contact us today! We would love to walk you through the process and help you finance your home sweet home.

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