Whether you’re a first-time homebuyer or a seasoned shopper ready to move into a luxury home in California, choosing the right mortgage is key to getting a good deal.
To help you determine the kind of mortgage that’s right for you, here’s a guide to the types of available home loans along with tips on finding the perfect lender.
Types of mortgages
BASIC LOANS
- Fixed-rate mortgage
Also known as conventional loans, these loans simplify payments and budgeting by locking in a fixed interest rate from start to finish. These loans are payable in 5, 15, or 30 years, with higher interest rates if you choose to pay over a longer period of time.
Why choose this type of loan? Fixed-rate mortgages are perfect for you if you plan to live in a home for a long time. You’ll know exactly how much you’ll be paying each year and you won’t have to worry about fluctuating interest rates.
- Interest-only mortgage
An interest-only mortgage requires the borrower to pay only the interest of the loan each month for the first five to 10 years. At the end of this period, the borrower has an array of options to pay off the principal. They include:
- Reverting to regular mortgage payments, which include a portion of the principal and the interest
- Refinancing their loan for new terms and possibly lower interest rates
- Making a one-time lump sum payment
- Selling the home to pay off the principal
Why choose this type of loan? This setup is great for first-time homebuyers and those who expect their finances to improve in the near future. The initial interest-only period may also help those with commission-based salaries make their payments.
- Adjustable-Rate Mortgage (ARM)
With an adjustable-rate mortgage, the interest rate on a loan will vary according to market conditions throughout the life of the loan. For an initial period, however, the lender will offer fixed interest rates that are lower than that of conventional loans. At the end of the period, interest rates will be adjusted based on market conditions that can change monthly, semi-annually, or annually. While ever-changing market trends can make it hard to predict how much to pay, price caps are set to protect you from market spikes.
Why choose this type of loan? Like interest-only mortgages, the low initial payments of ARMs work well for those who expect their income to improve over the years – enabling them to cover future increases in interest rates. ARMs are also a good option for those who plan on paying their mortgages in full within a set period of time.
SPECIAL ASSISTANCE LOANS
- FHA loans
Insured by the Federal Housing Administration, FHA loans work like conventional loans but require lower credit scores to qualify for a mortgage. Down payments also tend to be lower. The more relaxed requirements make these government-backed loans one of the top choices for first-time homebuyers.
- VA loans
VA loans are specially designed for veterans of the US Armed Forces by the Department of Veterans Affairs. In some cases, spouses can also be eligible to apply. Years of service and type of discharge determine requirements.
With a VA loan, you don’t have to make a down payment on a home and won’t have to take out a private mortgage insurance (PMI). A PMI protects the lender in case you default on payments. Interest rates are also lower and underwriting standards are less strict than that of conventional loans.
Tips for finding the right lender
- Have a good credit score
Your credit score has to be in good shape before anything else. Having a good credit score shows you have what it takes to repay your loan. It will also give you more leverage to negotiate for better rates.
Some ways to increase your credit score include:
- Paying your bills on time
- Paying off debt
- Keeping balances low on credit cards
A credit score of 701 to 749 is deemed “good” by private lenders, while a score of 650 to 700 is seen as “fair.”
- Compare rates
As with any investment, you should compare the rates of different lenders before committing to a loan. You can start by looking for mortgage rates that fit your budget. Use a mortgage calculator to estimate your monthly payments based on lending rates, the type of loan you prefer, as well as other variables. This will allow you to choose the lender that offers the best rates or make the most financial sense for you in the long run.
Don’t stop searching even if you think you’ve already found the rate you’re comfortable with. Research by Freddie Mac shows that you can save up to $3,000 just by searching for more quotes. That’s a deal you won’t want to pass up on.
- Interview several lenders
Once you have narrowed down your options, start scheduling interviews with lenders. Apart from their rates, you’ll want to know why they think you should go with them instead of others. Try to squeeze in as many interviews as you can within a week or two to save time and more quickly get to the next home buying stage.
Some questions to ask include:
- “What are all the costs?”
- “How long will it take to process the loan?”
- “Do you prefer to communicate through email, phone, or in person?”
Mortgage loans are costly commitments, so you can’t afford to go for the wrong one. If you’re looking to invest in California real estate, there’s no one better to call than me, Realtor Toni Patillo. Call 310.482.2035 or send me an email at toni(at)ToniPatillo(dotted)com to get started.