Mortgage Types: Which Is Best For You?

 Mortgage types come in all different flavors, sizes and choices. That's good news -- and something of a problem. The good news is that there are lots of choices while the problem is that you only get to choose one set of features for each loan.

So what are the mortgage types and which is best for you? One way to measure mortgages is to look at their key characteristics and then pick the combination of features which best meet your needs.

1. Cash or No Cash?

According to the National Association of Realtors (NAR), in 2013 the typical buyer purchased with ten percent down but that's a somewhat general figure. To be more precise, NAR says that down payments varied according to whether one was a first time purchaser (five percent down) or a repeat purchaser (14 percent down) and whether the home was new construction (12 percent down) or an existing home (nine percent down).

In other words, it's easier for repeat buyers to be in the market because they often have equity from the sale of a first home. Mortgages especially suited to those with smaller down payments include FHA, VA, USDA, Rural Housing, Fannie Mae's My Community Mortgage, Freddie Mac's Home Possible and HUD's Good Neighbor Next Door programs. There are also many down payment assistance programs offered by state and local governments and community organizations to those who qualify.

2. Insurance or No Insurance?

Lenders are happiest when borrowers want to purchase with 20 percent down, but that's not always practical. Instead, borrowers can get financing with far less down if they borrow with mortgage insurance from such well known programs as the FHA (3.5 percent down), VA (nothing down) and private mortgage insurance (5 percent down).

Borrowers should be aware that as well as the down payment there's also a need for cash to pay closing costs. Exactly how much is needed depends on the size of the loan, the jurisdiction where the property is located and any "seller contributions" which can be obtained from the home owner.

3. How Many Years?

We usually think of real estate financing in terms of 30 years but there are other terms available. For instance, Ellie Mae reports that 8.9 percent of all mortgages funded have a term of just 15 years.

If you finance with a shorter-term loan, you typically can get a lower interest rate when compared with a 30-year mortgage. Because the term of the shorter mortgage is reduced, the mortgage principal is being paid off faster and so the overall interest cost can be substantially lower. However, that short term also means that there is less time to repay the debt so monthly payments are higher.

Imagine that you borrow $100,000. With a 30-year loan the interest rate would be 4.12 percent as of September 2014 (according to Freddie Mac), so the monthly cost for principal and interest is $484.36 versus $703.15 for a 15-year mortgage at 3.26 percent. That's a big difference, and here's another one: If both loans are paid out over their full terms the 30-year borrower will pay out $174,369 while the borrower with the shorter loan will pay a total of $126,568 – a savings of almost $48,000.

Many borrowers are uncomfortable with a shorter-term loan and its higher monthly payments, so a compromise can work like this: get a 30-year mortgage and make monthly prepayments, something allowed without penalty by most loans today. Each prepayment effectively shortens the loan term and lowers the loan's overall interest cost.

But what if you refinance or sell the house? How do mortgage prepayments help? With prepayments, the debt is smaller so there is less to refinance or owe at closing.

4. Fixed or Adjustable?

Borrowers have the option of getting a fixed rate for the life of the loan or going for an adjustable-rate mortgage. A typical ARM today might have a one-year , three-year or five-year start period with a fixed rate, and then the loan can adjust up or down annually.

As of mid-September ARM ,rates were far lower than fixed-rate financing. Freddie Mac says a 5/1 ARM was typically priced with a 2.99 percent start rate while one-year ARMs were available just 2.45 percent.

Are ARMs a better choice than fixed-rate mortgages? A big part of the answer depends on future mortgage rates, how long the loan will be outstanding and the borrower's willingness to face a potentially-higher monthly payment. As a borrower ,it's up to you to determine how you feel about such issues.

5. How Big?

In terms of size, we usually think of "conventional" loans and "jumbo" mortgages. Jumbo loans – not surprisingly – are bigger mortgages. However, that's not the only difference -- jumbo mortgage are loans that don't have to abide by rules set by Fannie Mae and Freddie Mac, so program guidelines and pricing can vary much more widely than with so-called "conforming" loans. That makes it more important for borrowers who "go big" to shop around. In addition, the size of these loans (and their even larger cousins, "super jumbo" mortgages), makes it more important to get the best deal because a small difference in interest rate can mean a big difference in payment.

The usual definition of a jumbo mortgage today is a loan with an initial principal of more than $417,000 for a single-family home. In Alaska, Hawaii, Guam and the Virgin Islands, however, the loan limit can be $625,500.

Jumbo loans are often available with special terms, such as interest-only payments for several years.

Just using the five factors above suggests that there are more than 3,000 loan choices out there (5 x5 x 5 x 5 x 5 = 3,125). For more information and details speak with loan officers about your preferences and options.

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