Finding a Mortgage That's Right for You

Buying a home can be one of the most important and exciting decisions you make in your lifetime. Oftentimes though, this decision is paired with the daunting task of choosing a loan that is right for you from a pool of options. Although it is useful to have choices, learning the basics of home loans and understanding which mortgage fits your budget can be the key to securing your satisfaction with your new investment.

One of the keys to success is getting an affordable home loan with fair terms and reasonable costs. Homebuyers need to do their homework first to learn about the different types of loans on the market and to select the one that is in their best interest. They need to check their credit status and work with their REALTOR and a reputable lender to determine how much house they can afford.

For most consumers, the traditional mortgage is a good option. Traditional mortgages are usually insured by private mortgage insurance companies and tend to have low down payments. Private mortgage insurance adds a small cost to your financing, but it allows you to buy a house with a lower down payment. The lower the down payment is, the higher the mortgage insurance will be. Mortgage insurance helps the lender recover some of the losses incurred in case you stop making payments on the loan.     

A fixed-rate mortgage maintains the same interest rate over the lifetime of the loan. Many consumers prefer this mortgage option for its stability in terms of budgeting and planning. Fixed-rate mortgages most commonly come with 15- and 30-year options, but other lengths are available. These short-term loans come with a lower interest rate and higher monthly payments to encourage consumers to pay the loan back faster.

The adjustable-rate mortgage (ARM) generally has a lower initial interest rate, but the rate changes along with mortgages payments throughout the life of the loan. This mortgage option works well for buyers who only plan on being in the home for a short period of time or those who are financially stable enough to handle sudden payment increases. The most common ARMs fix the initial rate for three, five, or seven years. Before deciding on an ARM, you should ask the following questions:

• How long does the initial interest rate apply?
   

• How frequently can the interest rate change?
   

• How is the adjusted interest rate determined? (Generally, a specified amount –the “margin”– is added to a current published rate –“the index.”)
   

• How high can the interest go? (Remember, even small changes in your interest rate can affect your monthly payment significantly.)
   

• Are there any limits on how much the interest rate can change each year?
   

• Do the monthly payments still pay off the loan even if the interest rates increase? (With some loans, the amount you still owe – your “loan balance”– can increase rather than decrease each month. This is called negative amortization.)

As the rates on traditional mortgages continue to fluctuate, some are turning to specialty mortgages to “stretch” their income in order to qualify for a larger loan. Like ARMs, specialty mortgages begin with a low introductory interest rate, but monthly payments greatly increase towards the future of the loan. Common types of specialty mortgages include: interest-only, negative amortization, option payment ARM, and 40-year mortgages.

It’s in a consumer’s best interest to learn the ins and outs of these specialty loans, which can pose a greater risk that they won’t be able to afford the mortgage payment in the future. The Illinois Association of REALTORS has mortgage resources for consumers and potential homebuyers available where you can find information on loan programs and tips to avoid predatory lending.

In addition to conventional mortgages, one of the safest and most affordable types of mortgages is the Federal Housing Administration (FHA)-insured mortgage. The FHA mortgage insures homebuyers with less-than-perfect credit and offers low down payment options, a loan at reasonable cost and help with mortgage payments if needed. The Rural Housing Service (RHS), and the Veterans Administration (VA), also provide insurance for home mortgage loans.  

First-time homebuyers in Illinois may qualify for low-cost loans through the Partnership for HomeOwnership’s Rural Initiative, Quincy Initiative and HomePower Mortgage Assistance programs. Learn more at www.pfho.org.