A 30-year fixed loan is the best option
Typically, when people hear the word “mortgage,” they think of a 30-year fixed loan. While this is the most common loan type, it is not necessarily the best for every buyer.
ARMs (adjustable rate mortgages) are great for home buyers who don’t plan to live in their home for a long period of time. While the interest rate can fluctuate — or adjust — after the first few years, depending on the type of ARM, these loans usually offer a lower initial interest rate and a limit on how much the rate can fluctuate.
Even for home buyers who plan to stay in their home longer, 15-year fixed-rate mortgages and other shorter-term loans include significantly less interest over the life of the loan and the ability to build equity on their home at a faster pace when compared to 30-year fixed loans.
There is no one-size-fits-all loan type; each offers benefits (and potential drawbacks) depending on the home buyer’s unique situation.
Renting is more affordable, all things considered
While renting comes with convenience benefits — renters don’t have to worry about replacing a broken appliance or patching a leaky roof — property managers and landlords build those unforeseen costs into the price of the rent so they can remain profitable. And, in many parts of the country, rental rates are rising faster than home prices.
Homeowners will incur the costs of property taxes, repairs and home maintenance, but they also benefit from the equity accumulated in the property when they sell or refinance, and can take advantage of tax breaks for homeowners.
Every real estate market and every prospective home buyer is different; there is no definitive answer to the rent vs. buy question, but there are several online tools available to help your clients come to a decision that’s right for them.
You need 20 percent down to get a loan
Traditionally, a buyer got a 30-year fixed loan and put 20 percent down. But times have changed.
With higher home values have come creative loan products. These products put purchasing a home within reach for qualified buyers while avoiding the subprime lending problems of the mid-2000s. Today, there are government-backed loans such as those from the Federal Housing Administration (FHA) that allow for as little as 3.5 percent down. With interest rates still at 20-year lows, a smart buyer will leverage the bank’s money to work for them.
You need a great credit score to buy a home
While a good credit score will provide buyers with more loan options, it is not the be-all and end-all. An applicant with a lower credit score will almost always pay a higher interest rate on their loan compared to someone with a more favorable credit score, but homeownership is still a possibility.
Certain loan programs offer options for borrowers with lower credit scores to qualify for a home loan. For instance, if a borrower’s credit score is below 580, the FHA requires potential borrowers to provide a 10 percent down payment versus around 3.5 percent for potential borrowers with a credit score above 580.
Being pre-qualified is the same as being pre-approved
It’s easy to understand why people get these two terms mixed up: They sound similar and the have similar definitions, but there is one distinct difference.
Pre-approval is based on actual documentation and gives prospective borrowers the actual loan amount for which they are approved. Pre-qualification gives the prospective borrower an estimate of how much they can afford. Pre-qualification amounts are not guaranteed, because it is simply an estimate.
Pre-approval allows the buyer to look for homes at or below the approved amount. A pre-approval also gives the seller confidence, because the buyer is already pre-approved for a certain mortgage amount.
The lowest interest rate is always the best choice
Choosing the loan with the lowest interest rate is not always the best option. To offset the low interest rates, banks often charge excessive fees to cut into the savings that you would otherwise receive.
Additionally, ARM rates tend to be lower than fixed-rate loans during the initial term of the loan, but then the rate can increase. Potential borrowers should always take loan terms, loan period, interest rate and fees into account when weighing their mortgage options.
All lenders and mortgages are the same
A lot of borrowers think that all mortgage lenders and loans are created equally. In fact, many lenders have their own unique loan programs, and some lenders implement extra requirements known as overlays on top of minimum loan guidelines (if applicable). Lenders also feature a range of rates and fees associated with their various loan products. Consumers should consider speaking with a few lenders before choosing the person they want to work with on their home loan.