A mortgage is a long-term loan you use to purchase a home. When you get a mortgage, you’re signing a contract promising to repay the loan plus interest and other costs. Your home is collateral for that loan.
You can choose from a variety of mortgage options.
Fixed-Rate vs. Adjustable-Rate
Fixed-rate mortgage: With a fixed mortgage, your interest rate remains the same for the entire life of the loan and you’ll always have the same payment each month This is most commonly available in 15-year and 30-year options.
Interest rates on a 15-year mortgage are usually lower than the 30-year mortgages, so you’ll end up paying less in interest and you’ll pay off your entire mortgage in just 15 years. With a 30-year mortgage, your payments will be lower since you have 15 more years to pay off the loan.
Adjustable rate mortgage (ARM): These have an interest rate that changes or “adjusts” every year based on the market. Often, these loans come with an initial fixed lower rate for a certain number of years, and then the rate adjusts after the initial period. With an ARM, your monthly payments could go much higher should interest rates rise.
FHA or Conventional Loan
You’ll also have to choose between FHA loans and conventional mortgage loans.
FHA loan: An FHA loan is a mortgage loan that gets insured by the Federal Housing Administration, which is part of HUD (United States Department of Housing and Urban Development. As a borrower, you would apply for one of these loans through an FHA-approved mortgage lender.
The benefits of FHA loans are a smaller down payment, more flexible guidelines for credit scores and debt-to-income ratios. If you default on the loan, the FHA will cover the lender's losses. For this reason, borrowers need to get approved by both the FHA and the lender to get this type of loan.
A conventional loan is not insured by the government. The primary benefit of using a conventional loan is that you can avoid mortgage insurance. If you make a down payment of 20% or more, you won't have to pay for mortgage insurance. But if you put down less
than 20%, you'll have to pay for it.VA Loan:
The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program is that borrowers can receive 100% financing for the purchase of a home. That means no down payment is needed.USDA Loan:
The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing. Income must be no higher than 115% of the adjusted area median income [AMI]. The AMI varies by county.
Borrowers can combine the types of mortgage types. For example, you might choose an FHA loan with a fixed interest rate, or a conventional home loan with an adjustable rate (ARM). Have question? We can answer them. Contact Lisa Traulsen, CU Community's loan officer via email