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Understanding the Wide Variety of Purchase Loan Options


Posted on: December 17, 2012

Being a homebuyer is exciting and overwhelming. The thrill of looking for the perfect home, finding the best location, exploring new neighborhoods and looking at a wide range of home styles can ignite ideas and create a passion for colors, styles, and design that you didn’t know you were interested in. Buying a home can be overwhelming, however, because of the price, the pressure, and the huge and complex range of options that are available to make purchasing a home a reality. The fear of purchasing something that you can’t afford, the fear and uncertainty about job security, the ability to make payments on-time and in full. Owning a home is a huge responsibility; the entire cost of ownership rests squarely on your shoulders and you are the only one who is accountable. There is both great risk and great reward involved with owning a home, and a variety of purchase options to help make your dreams of owning a home a reality.

If this is your first time buying a home and you have less than 20% of the purchase price to put down, you may opt for an FHA mortgage. An FHA (Federal Housing Administration) mortgage is a loan that is insured by the FHA, which means that lenders will approve a loan with a low 3.5% down payment. FHA then insures the lender in the case of default.

FHA loans are more expensive than if a borrower puts 20% down on a conventional loan. FHA loans with a 3.5% down payment currently require monthly mortgage insurance of 1.35% per year in most cases, as of April 1, 2013. For instance, a $100,000, 30-year loan with 3.5% down would require a $1350 per year payment. This payment is split into 12 equal parts and paid by the borrower along with the mortgage payment. So an extra $112.50 would be added to the monthly payment with an FHA loan in this case.

FHA loans also require an up front mortgage insurance payment, currently 1.75% of the loan amount. A $100,000 loan would cost the borrower an extra $1750 in up front charges. This amount can be added to the loan amount.

If you have a 5% – 20% down payment, and good credit, a conventional loans might be the best option for you. A conventional loan with less than 20% down still requires mortgage insurance, called private mortgage insurance (PMI), but there is no up front mortgage insurance cost, like with FHA. Also, borrowers with excellent credit may be able to obtain private mortgage insurance at a lower monthly cost than FHA mortgage insurance.

If you have great credit and have a high income, you may qualify for a 15 year loan, as opposed to the traditional 30 year. While this will increase the monthly payments, it will allow you to pay off your home much more quickly and save you thousands of dollars in interest payments. If you can pay off your home in fewer years than the term of your loan, you should, because it will save you huge amounts of money that would usually go towards interest payments. Less time spent paying off your loan always means more money saved.

If you are looking for a home, take time to speak to several different lenders about the mortgage options available for you. This will help you understand what you qualify for, and will also tell you how much you will qualify for and will help you find your price range and what you can afford to pay for a home.

Sources: FHA 4155, Fannie Mae Guide