What Mortgage Should I Have?

Types of Mortgages are Available

There are so many different types of real estate loans and there is no substitute for contacting a lender to determine what they have to offer. I'll give you the basic types and define some of the language used to describe the loans. Keep in mind that your work history and credit score will determine if you qualify for a loan and at what interest rate.

Fixed rate conventional:

These loans have a set interest rate. Your monthly payment is set and only increases to compensate for increases in your real estate property taxes and home owners insurance.

15 year vs. 30 year term:

Most people go with a 30 year term on their loan. The payment is lower or you can qualify for higher priced homes. There are advantages to 15 year loans if you can afford the extra payment. You get a slightly lower interest rate (usually ¼ to ½% lower), and you build equity in your property quicker.

Regarding Equity:

Some people get a 30 year loan to play it safe and then make a larger payment, if they can afford it, to accelerate the 30 year loan.

40 year term : There is another conventional loan with a 40 year amortization for single family homes. As property values go up, this may become popular in some parts of the country. This loan could also be used to buy a higher priced home. It’s a long time to pay a house off compared to traditional 15 and 30 year terms, but in some cases it could make sense.

ARM (Adjustable Rate Mortgage) : An adjustable rate mortgage is one where the interest rate, and therefore the payment can adjust throughout the term of the loan. Usually, the rate is lower up front than that of a fixed rate mortgage. There are many types of ARMs.

Have your lender explain the specific terms.
Questions to ask your lender about an ARM:

FHA loans (Federal Housing Administration): FHA provides low down payment real estate loans for owner occupied single family homes, duplex, triplex and fourplex apartment buildings. The typical down payment on an FHA loan is 3%. FHA does put
caps on the purchase price because it is designed for owner occupied home buyers. Currently in Salt Lake City and Salt Lake County, the cap for a single family home is around $239,000. The loan amount increases for duplex, triplex and fourplex apartment buildings.

VA Loan (Veterans Administration) : VA loans are for people who are active U.S. military or veterans. These loans typically have slightly better rates than conventional loans and low down payments.

Balloon Loans: Balloon loans typically have a slightly lower rate than a conventional
loan and are the same as a conventional loan with one exception. At the end of a predetermined year (usually year 5, 7, or 10) the lender calls the loan due. At that time, if the owner hasn't already refinanced or sold the house, they must refinance the loan. This type of loan can be risky if interest rates increase, your financial situation changes for the worse or if the price of real estate decreases.

Stated Income Loans:

A Stated Income Loan is typically used by self-employed people who have good credit, but don't show a lot of income. The lender allows the Buyer to state their income to an extent to qualify for the loan. The interest rate and/or down payment might be higher than that on a conventional loan.

Construction Loan:

A construction loan is a temporary loan you get to build a house. Some construction loans allow you to use the equity in your land as part of your down payment. Keep in mind that construction loans are short term interim financing, usually for 12 to 18 months. After construction is completed, the Buyer refinances into
permanent financing. There is much to know about this process and the loans involved. Make sure you have a team of experienced professionals.

Interest Only Loan:

This loan is just as it sounds. Only interest is paid, so the principle (amount you owe) stays the same. This type of loan started out as a loan designed for wealthy people who would rather invest their extra money in other investment. Due to the increased values of property in major metro areas, this loan is being used by some people just so they can afford to buy real estate. Interest only loans can be risky if the value of the real estate flattens out or declines.

JUMBO/Non-conforming : This loan is exactly what it sounds like. It's a loan for expensive homes and typically comes with a higher interest rate and/or down payment that a conforming conventional loan.

Refinancing your real estate loan

Keep in mind when you refinance, you start the loan over. If you have a great
rate on a loan, stick with it, otherwise you restart the process of building equity. Interest is greater earlier in the loan, and most of your equity is built later in the loan.

To determine if it makes sense to refinance, look at the savings of refinancing and the cost to do the refinance loan. How long it will take to pay the refinance back. How much longer do you plan on owning this home?

Another factor, if you have an adjustable rate mortgage there is some risk that the rate will go up. This should be part of the equation when making your decision.