The Perfect Mortgage

Finding The Loan That's Right For You

Understanding Mortgage Options

Understanding your mortgage options once you think through your goals and determine how much you can comfortably afford to pay each month, then it’s time to choose a mortgage. With so many different mortgages available, choosing one may seem overwhelming. The good news is that when you work with a responsible lender who can clearly explain your options, you can better select a mortgage that is right for your financial situation. Here are the major mortgage types:

Conventional Loans

Pros: When you calculate interest and fees, your total cost is lower than an unconventional loan.

Cons: Conventional loans aren’t backed by the government, so lenders can charge a higher interest rate or require a higher down payment (typically at least 5%) compared to unconventional loans. This type of loan also requires you to pay private mortgage insurance (PMI) if your down payment is less than 20% of the home’s value. PMI protects the lender if you default on your loan—but it doesn’t go toward paying off your home.

Subprime Mortgages

Pros: The perceived pro is that lenders will give you money to buy a house, even if you have bad credit and no money. Subprime mortgages were designed to help people who experience setbacks—like divorce, unemployment, and medical emergencies—get a house.

Cons: Lenders know there’s a big risk in lending money to people who have no money—go figure. So these mortgages come with crummy terms like high interest rates and stiff prepayment penalties.

FHA Loans

Pros: With Federal Housing Administration (FHA) loans, you can get a mortgage with as little as a 3.5% down payment.

Cons: You’re required to pay a mortgage insurance premium (MIP)—a fee similar to PMI, except that you have to pay it for the life of the loan. The only way to remove MIP is if you have more than a 10% down payment—but even then, you’ll still have to pay it for a duration of 11 years! MIP can tack on an extra $100 a month per $100,000 borrowed. If you’ve borrowed $200,000, that’s an extra $200 on top of your regular mortgage payment each month. No thanks!

VA Loans

Pros: With Department of Veterans Affairs (VA) loans, military veterans can buy a home with virtually no down payment or mortgage insurance.

Cons: When you purchase a home with zero money down and things change in the housing market, you could end up owing more than the market value of your home. VA loans also come with a funding fee. This fee can range anywhere from 1.25% to 3.3% of your loan, depending on your military status, down payment amount, and whether it’s your first time financing a home with a VA loan. That’s anywhere from $2,500 to $6,600 for a $200,000 loan.

USDA/RHS Loans

Pros: The United States Department of Agriculture (USDA) offers a loan program, managed by the Rural Housing Service (RHS), to people who live in rural areas and show a financial need based on a low or modest income. With this loan, you can purchase a house with no down payment at below-market interest rates.

Cons: You can’t refinance your loan to improve your interest rate, and the prepayment penalties are horrendous. USDA subsidized loans are designed to get people who really aren’t ready to buy a house into one. If that’s the only way you qualify, then you can’t afford a home right now.

Bottom line: Avoid the higher fees and hidden restrictions of unconventional loans. Go with a conventional loan and pay a lower total cost.

Mortgage Rates

When might a fixed-rate mortgage make sense? If you plan on owning your home for a long time (generally 7 years or more). If you have a monthly budget you need to stick to and prefer payment stability. (Keep in mind that your property tax and homeowners insurance payments can fluctuate throughout the life of your loan. But your monthly principal and interest payment will never change.

Fixed-period Adjustable-Rate Mortgage (ARM) or hybrid ARM Most lenders today offer a fixed-period or hybrid ARM,—which is an adjustable-rate mortgage that features an initial fixed interest rate period, typically of 5, 7 or 10 years. After the fixed-rate period expires, the interest rate becomes adjustable for the remainder of the loan term. Fixed-period ARMs are often named by the length of time the interest rate remains fixed.

Example: In a 5/1 ARM, the 5 stands for the five-year introductory period, during which the interest rate remains fixed. The 1 shows that the interest rate is subject to adjustment once per year after the introductory period and for the remainder of the loan term.

About the introductory period: The rate on this kind of loan tends to be lower during the introductory period, which could mean a lower starting monthly payment. However, when the introductory period ends, your rate will go up or down depending on changes in the financial index to which your loan is associated. If considering an ARM, carefully consider your ability to handle potential increases to your rate, and consequently, your monthly principal and interest payment.

Caps: ARMs have both a periodic adjustment cap and a lifetime interest rate cap. Periodic adjustment caps limit how much a rate can increase in any given period. Most ARMs today only adjust annually, so a periodic adjustment cap is also known as an annual adjustment cap. Many caps allow a significant increase in each adjustment period and over the life of the loan, so despite having a cap, the increase in the monthly payment allowable under the cap may still result in payment shock. Such an increase may make it difficult, or impossible, for your to pay your mortgage on time if interest rates rise. If you’re considering an ARM, find out what the caps would be and then run the numbers to see if you could still comfortably afford the monthly payments allowable under the rate caps.

Mortgage Loan Options

Alternative mortgage options Some eligible home-buyers may qualify for an FHA (Federal Housing Administration) or a VA (Department of Veterans Affairs) loan. These loans tend to allow a lower down payment and credit score when compared to conventional loans.

FHA loans: FHA loans are government-insured loans that could be a good fit for home-buyers with limited income and funds for a down payment. Bank of America, an FHA-approved lender, offers these loans, which are insured by the Federal Housing Administration (FHA)

VA loans VA loans are offered by VA-approved lenders like Bank of America, and are insured by the Department of Veterans Affairs. To qualify for a VA loan, you must be a current or former member of the U.S. armed forces or the current or surviving spouse of one. If you meet these requirements, a VA loan could help you get a mortgage.

And finally, be sure to ask your mortgage loan officer if they offer affordable loan products or participate in housing programs offered by the city, county or state housing agency. You may be eligible for grants, flexible, lower down payment options and down payment and/or closing cost assistance.