If you are ready to purchase a home you will need to know what types of home mortgage loans are available and the benefits and liabilities of each for the borrower. Keep in mind that a lower interest rate on a larger loan amount for a longer life of the loan may not compute to the least amount of interest paid out. You certainly don’t want to pay more interest than is necessary.
When comparing loan types you need to know that interest on a home mortgage loan is tax-deductible if you itemize on your filing. You can get the advice you need on that at the appropriate time from the Tax Crisis Institute.
A conventional loan is a loan not insured or backed by any federal agency and they are usually more difficult to qualify for. There are different types of conventional loans.
- A conforming loan is a loan that conforms to the loan standards set by Freddie Mac (FHLMC) and Fannie Mae (FNMA) which primarily defines the maximum amount to lend on single-family dwellings. Fannie Mae and Freddie Mac do not issue loans. They Insure loans. In higher-priced housing markets, special exceptions can be made regarding the limit set.
Interest rates are lower with a conforming loan and can be gotten with as little as 3% down payment. If your down payment is less than 20% you will most likely have to pay for private mortgage insurance (PMI) which can be included in your monthly mortgage payment. If your income falls below a specified amount the PMI can be tax-deductible. You will want to consult with a tax specialist. Tax Crisis Institute can help you with that.
- A nonconforming conventional loan often referred to as a Jumbo Loan, exceeds the maximum loan amount allowed by Fannie Mae and Freddie Mac. Since a non-conforming loan is not insured by Fannie Mae or Freddie Mac it presents a greater risk to the lender and therefore more difficult to get approved. Despite the risk, interest rates are competitive with a conforming loan. However, you will need an exceptional credit score and lower debt to income (DTI) ratio to qualify.
- A fixed-rate loan is a conventional loan that guarantees the interest rate for the life of the loan. Your principal plus interest amount will remain unchanged. Fixed-rate interest loans have options on the duration of the loan with the most common being 15 years and 30 years. Note If you include your homeowner’s insurance and property taxes in your loan payment the payment will increase as those expenses increase. Still, this will provide stability in your budget regarding housing.
- With an adjustable-rate (ARM) conventional mortgage the interest rate can change during the life of the loan. There is a 5/1 ARM that guarantees the interest rate for the first five years and the rate is often better than that of a fixed-rate loan. If you will pay the same amount as a fixed-rate loan during those first five years you can reduce your loan balance and increase your equity more quickly. While rates can increase, they could go down.
- Interest-only mortgages are also available. With this type of loan, only the interest is paid for the first 5-10 years after which it converts to a conventional loan with the principal being added to the monthly payment. If you are in a tight financial position but expecting an increase in your status in the near future you might consider an interest-only loan.
Government Secured Loans
Government secured loans include FHA, VA, and USDA. These loans usually require a smaller down payment than other types of loans and do not require as high a credit score. It is often possible to secure a loan with no down payment.
An FHA loan is backed by the Federal Housing Authority which provides loan protection to approved lenders. These loans are most often used by first-time homebuyers because lower down payments are required and approval is less difficult. FHA loans are offered with 15 and 30-year duration and are fixed interest rate loans. Their interest rates are generally higher than conforming conventional loans. Though they are backed by the Federal Housing Authority, the borrower will need to pay a mortgage insurance premium (MIP) for the life of the loan.
A USDA loan is backed by the US Department of Agriculture The purchase must be made in a qualified rural area and there are income restrictions. A USDA loan can be used to purchase land only but you will need to have plans for the land and be required to build soon. These loans can be made with no down payment and interest rates are usually lower than conventional fixed-rate loans. Because of these advantages, you will be required to pay mortgage insurance which can be included in your monthly payment.
VA loans are loans available to active military and veterans and are.partially backed by the Department of Veteran Affairs. A VA loan can also be available to spouses of veterans who have died in the line of duty. No down payment is required and a higher DTI ratio is allowed for approval. There is a VA Funding Fee that is paid directly to the agency but can be financed in the loan. VA loans usually have lower interest rates than conventional or FHA loans. Your interest will be impacted by your credit score and DTI ratio.
What Is My Best Interest Rate?
Your best interest rate is affected by what kind of loan you qualify for, what you have for a down payment, your credit score, and your DTI ratio. Your lowest overall interest is also determined by your interest rate multiplied by the length of your loan. When you purchase a home instead of renting, you build your wealth by building equity in the property as you consistently make your loan payments. At the end of each year you can claim the interest you pay to the lender as a deduction on your taxes.
Tax Crisis Institute has been a tax relief leader for over 30 years. When you work with the Tax Crisis Institute, we’ll make sure you don’t pay anything more than you owe!
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