So, you’ve got all of your financial ducks in a row and you’re ready to start applying for a pre-approval on a mortgage. But… what’s the difference anyway? As mortgages are a significant financial commitment, it is important to take a look at the pros and cons of the types of mortgages you are considering.
Here at Sandi Meisse, we want to be sure that all of our clients enter into a home that will allow them to prosper and thrive. This includes being confident in your mortgage choices. As a result of this moral, we’ve put together this list of pros and cons for the two most commonly discussed mortgage options for first time home buyers- Conventional Fixed Mortgages and FHA Loans.
CONVENTIONAL FIXED MORTGAGES
Conventional Fixed Mortgages are the most common types of mortgages, accounting for about 75% of all home owner’s loans. Conventional Mortgages are provided through private lenders. Fixed Rate Mortgages are typically for a 30-year duration.
- One of the most important pros of a Conventional Fixed Mortgage is that it is predictable- meaning you never have to worry about your monthly mortgage rate changing due to interest fluctuations. This makes budgeting simpler.
- Since most Conventional Mortgages require a 20% down payment, upon closing on your home you will already have equity on the property.
- Conventional Fixed Rate Mortgages do not require PMI (Private Mortgage Insurance), which will save you a bunch of money over the 30-year duration of your mortgage
- Because your interest rate is fixed, you will be stuck paying the set amount of interest each month even if the tax rate in the area you live in goes down. The only way to have the interest rate changed would be to refinance your home. Additionally, most lenders will apply an early repayment charge.
- The down payment is high. 20% is a hefty chunk of change. If you are planning to finance a home that has a $200,000 market value, you would need to come up with a down payment of $40,000. Because of this, many home buyers take out an additional personal loan to cover the difference of their savings and the remaining balance of the down payment. This would be an extra financial commitment on top of your mortgage.
Federal Housing Administration Loans, more commonly referred to as FHA Loans, are targeted towards individuals who may not have a large amount of money to put towards a down payment or do not have a credit score the private lenders are looking for. Generally, FHAs require a credit score minimum of 580 allow as little as 3.5% for a down payment.
- Who doesn’t want a lower down payment? If we take a look at the example we talked about earlier for a home with a market value of $200,000, the down payment of 3.5% would be $7,000.
- FHA Loans are backed by the government as subsidized loans. This means the lenders are protected against defaults on payments, which makes it easier for borrowers to secure lower interest rates.
- Relaxed credit requirements and higher debt-to-income rates are allowed. This means that if you have outstanding debts such as student loans or car loans which account for more than your monthly income, you can still acquire a mortgage approval. FHA lenders are more understanding that private lenders that you may have made some credit mistakes in the past.
- MIP is required for the duration of the loan. MIP stands for Mortgage Insurance Premium. This is insurance on the money you are borrowing from the lender to protect the lender in case there is a default on payments. The MIP is required until the mortgage is paid in full.
- Higher interest rates. Because you are only required to pay a low down payment and lenders allow a less than perfect credit score, they protect their investment through the interest they tack onto your loan.
- Not all property purchases qualify for an FHA loan. Properties such as investment properties are not allowed. The home must also pass an FHA inspection, which requires electricity, drinkable water, adequate heat, and a stable roof.
The Sandi Meisse Team has an ample amount of inventory that would meet both types of mortgage criteria. Give us a call at 570-402-8536 or click the contact tab on our website to send us an email to schedule an appointment.