If you are applying for a mortgage and think that it is a straightforward choice of just choosing your preferred lender that is offering the best rate of interest, you may well be in for something of a surprise when you start the process.
If you are looking to talk to someone about the different range of home loans available, you can get info from CalMtg.com, which may well help.
Here is a look at some of the many options available on a home loan application and some of the questions that you may want answering before you go ahead and formally ask to borrow the money you need.
Choice of rate options
It can be easy to get dazzled by a headline rate and think that the lowest one around is going to be the best option, but it may not always turn out to be the smartest choice.
You often get the choice on a conventional mortgage application, whether you want to apply for a loan where the rate is fixed for a certain period or time or whether you want to agree to paying a variable rate.
A fixed-rate mortgage loan means exactly that. It is a product that offers you the choice of agreeing to pay the same rate of interest on your loan for a specified period of time, meaning that your mortgage will be the same for duration of the fixed period, regardless of what happens to interest rates.
If you take a variable rate, it does what it says on the tin. The interest rate you pay on your loan will vary according to what happens to interest rates.
If the cost of borrowing goes down, you could benefit by getting a rate cut, but if the rates start to rise, your monthly payments will go up in line with these rises.
You have to decide if you want the comfort of knowing exactly how much you are going to pay each month or whether you might be better off going with a variable rate. It is almost impossible to say which option is better, because no one knows how rates will change in the years to come, meaning you are shielded from hikes in your payments when rates rise on a fixed rate deal, but miss out on any decrease in rates, if you are locked into the same rate whatever happens.
Conventional or government-insured loan
Having wrestled with the dilemma of choosing either a fixed rate or variable rate, another major decision is whether a conventional loan is right option or whether to apply for a government-insured loan.
With a conventional loan, you are taking out a home loan that is not insured or guaranteed by the federal government.
There are three main types of government-insured loan to consider. FHA loans are available to buyers of varying circumstances and not just restricted to first-time buyers. How it works is that the government insures the lender against any losses they might incur if you default on your mortgage.
The good point about this type of loan is that you may be able to put a down payment of as low as 3.5% of the purchase price, but the sting in the tail, is the insurance part of the loan, which will increase your monthly payments.
There are also specific loans available called VA loans, which is a loan program designed to assist military service members and their families. If you qualify for this type of loan, it is possible that you can receive up to 100% financing and won’t need to find a down payment.
There are also USDA or RHS loans which are backed by the United States Department of Agriculture (USDA) or the Rural Housing Service (RHS). These loans are aimed at applicants involved in agriculture or living in rural areas, where income levels are low.
One other important distinction to be drawn about your mortgage options, is whether the size of your proposed loan makes it a conforming or jumbo loan.
A conforming loan is one that meets the underwriting guidelines issued by Fannie Mae or Freddie Mac, which are the government-controlled entities that operate these loan schemes.
If you are applying for a jumbo loan, which gives you a clue in its name, then you will need to have a good credit record and be able to offer a decent down payment, as it will be a loan that is considered too large to qualify for any government assistance, and is therefore perceived to be a riskier proposition.
There are so many different options to consider, which is why it often pays to consult a mortgage broker, who has a good handle on what type of loan would suit your particular needs.
Paige Little is as a personal finance consultant who mostly works with first time buyers who need help sorting out their finances in order to get a mortgage. She writes about buying vs renting and mortgages for a range of personal finance and property websites.