Buying a home is a complex project. It is only natural to have a lot of questions about mortgages and how to secure the lowest monthly mortgage payment. Even if you do some research in advance, you will probably need clarification on some points. Considering these seven questions will help you understand the mortgage process better. Reach out to a mortgage professional with any home loan-related questions.
So, which combination of factors would result in the lowest monthly mortgage payment?
Does low interest rate result in the lowest monthly mortgage payment?
Everyone wants a low rate of interest. You will feel better the less you have to pay interest in order to borrow money. Low interest rates can help you keep your mortgage payments low.
Your mortgage payment usually consists of the following:
- Real Estate Taxes
- Homeowner’s insurance
- If applicable, mortgage insurance
You can keep your monthly payment lower if you have a low rate of interest, regardless how much you borrow. This will make loan payments more affordable.
You would have the ability to make a large downpayment, pay the longest term and get the lowest interest rate in a perfect world. You can still work on a few factors if you don’t reach this goal. Because lenders are willing to take some risk by extending your loan for that long, you might not get the lowest interest rates if you take out a 30-year loan.
If you have a large downpayment and can offset the risk of the loan being extended for a longer term, you might get a lower interest rates than if you had made the minimum downpayment.
Does a large downpayment result in the lowest monthly mortgage payment?
Each loan program requires a minimum downpayment. Certain loan programs, like the VA or USDA loans, don’t require any down payments at all. This can be a great feature, especially if you don’t have much money saved. However, it can lead to a high monthly payment. Your monthly payment will increase the more money you borrow from the bank.
You can lower your monthly payment if you are able to make a larger downpayment. FHA loans require a 3.5% downpayment. However, if you can afford a 10% downpayment, it will reduce the monthly payment. While you will still have to pay mortgage insurance, you can borrow less money and pay less for mortgage insurance.
A large down payment can also help you avoid paying Private Mortgage Insurance on conventional loans. You can skip the PMI if you put down 20%. PMI will be paid for a shorter period if you have a lower down payment than the minimum 5%. PMI can be cancelled for conventional loans if you owe less that 80% of the home’s worth.
If you use a government-backed program such as the FHA loan or USDA loan, you will have to pay mortgage insurance for the entire term of the loan. A larger down payment won’t help. Because VA loans don’t require mortgage insurance, it won’t work.
Would a long term loan result in the lowest monthly mortgage payment?
It would be natural to want the shortest term, but you may not want to pay the highest monthly mortgage payment. You can pay your loan off in less time by taking a shorter term. This is a great idea, but you will want to pay the lowest monthly payment if possible.
The 30-year loan is currently the longest available term. This amortizes your loan for 360 months. Lenders also offer the 25, 20, or a 15 year term. The 15-year term will have the highest principal payments because you have only 180 months to repay the loan. This is half the amount of the 30-year loan.
A 30-year loan has the advantage of allowing you to make higher payments if you have the funds. A mortgage calculator can be used to calculate a 15-year monthly payment and then make the payments. You will see a faster reduction in your principal if you make an extra payment on top of the minimum.
Maximizing your factors is key. Every borrower will find the right’sweet spot’ to get the lowest monthly mortgage payments.
1. What types of home loans are available?
When you first reach out to a lender, ask what types of loans they offer. Don’t be afraid to ask mortgage-related questions you want to be answered. The mortgage professional you speak with should be more than willing to discuss the details of getting a mortgage. They should share the pros and cons of every type of home loan. The right mortgage broker will help you decide which mortgage is the best for your situation.
Types of Mortgage Loans for Homebuyers
As a homebuyer, you have several options to finance your home. Choosing the right home loan for you is easy once you know the difference between the different types of mortgages.
Here are the most common mortgage options for homebuyers:
Conventional home loans could be a great option for borrowers with a down payment of at least 3 percent, strong employment, and credit history. The federal government does not insure this type of home loan. You can choose between two kinds of conventional home loans: conforming and non-conforming. Conforming loans fall within the limit set by Fannie Mae or Freddie Mac. Home loans that don’t meet the guidelines set by the government-sponsored enterprises (GSEs) are considered non-conforming mortgages.
Pros and Cons of Conventional Mortgages
Pros – You can take out a conventional mortgage to finance an investment property or a primary home. This type of home loan has a lower cost than other types of home loans, even if interest rates might be a bit higher. If you make a less than 20 percent downpayment, you will have to pay PMI (private mortgage insurance). After you have gained 20 percent equity, you can request that the lender removes the PMI requirement. Loans backed by Fannie Mae or Freddie Mac require as little as a 3 percent down payment.
Cons – To qualify for a conventional mortgage, you need to have a FICO credit score of 620 or above and a debt-to-income ratio of 45 percent to 50 percent. If you make a down payment that is less than 20 percent, you will possibly be required to pay PMI. Extensive documentation is required to verify employment, assets, down payment, and income.
Jumbo home loans are conventional types of mortgages with non-conforming loan limits. If the price of a home exceeds federal loan limits, it would be considered a jumbo loan. Currently, the maximum conforming home loan limit for single-family homes in most of the U.S. is $510,400. In some high-cost areas, the ceiling is $765,600. Jumbo loans are much more common in higher-cost areas such as California. Jumbo loans normally require more in-depth documentation to qualify.
Pros and Cons of Jumbo Mortgages
Pros – Jumbo loans are a great option for homebuyers in expensive areas such as California. The interest rates are competitive with other conventional home loans.
Cons – One of the Jumbo loans’ major downsides is requiring a hefty down payment, 10 to 20 percent. Jumbo loans also have a high FICO score requirement. A credit score of 700 or higher is required to qualify for a jumbo mortgage. The debt-to-income ratio can’t be above 45 percent. To qualify for a jumbo mortgage, you must show assets in a savings account or cash.
Who should get a jumbo home loan?
Jumbo loans are a great option for more affluent buyers purchasing either a high-end home or a home in an expensive area. In order to qualify for a jumbo loan, borrowers need a good to excellent credit history. They also need the funds for a large down payment and have a substantial income. Many lenders offer jumbo home loans at competitive interest rates.
The biggest advantage of a fixed-rate mortgage is that it keeps the same interest rate over the loan’s life. Your monthly mortgage payments remain the same amount for the life of your loan. This is great because there are no changes or surprises about the amount you have to pay each month. Fixed mortgages generally come in terms of 15 years or 30 years.
Pros and Cons of Fixed-Rate Home Loans
Pros – Your monthly principal and interest payments stay the same amount for the term of the home loan. A fixed-rate mortgage helps you precisely budget your expenses from month to month.
Cons – With a longer-term loan, you’ll pay more interest. Interest rates are generally higher than on adjustable-rate home loans. It can take longer to build equity in your property.
Who should get a fixed-rate mortgage?
A fixed-rate home loan makes sense if you plan to stay in your home for at least seven to 10 years. This type of mortgage provides stability with your monthly payments.
Adjustable-rate home loans are unpredictable. Unlike the stability of fixed-rate mortgages, adjustable-rate mortgages (ARMs) have fluctuating interest rates that can change. The interest rates can go up or down with market conditions. Some ARM home loans have a fixed interest rate for several years before the loan changes to a variable interest rate for the remainder of the loan term. Before you commit to an adjustable-rate mortgage, understand how much your monthly mortgage rate or interest rate can increase, so you don’t end up in financial trouble when the mortgage resets.
Pros and Cons of Adjustable-Rate Mortgages
Pros – In the first years of homeownership, you will enjoy a lower fixed interest rate. The lower interest rate will result in a substantial amount of money saved.
Cons – In the long-term, adjustable-rate mortgages are unpredictable. After an interest rate hike, your monthly mortgage payments could become unaffordable, and you might have to default on your mortgage. If your home’s value decreases, you might be unable to refinance or sell your home before the mortgage resets.
Who should get an adjustable-rate home loan?
If you are comfortable with the risk of an adjustable-rate mortgage, it might be a good option for you. For people who plan on selling their homes within a couple of years, an adjustable-rate home loan might make sense because an ARM could save you a lot of money on interest payments.
Government-Insured Home Loans
For many homebuyers, the only way to qualify for a mortgage is through a U.S. government-insured loan. Even though the government isn’t a lender, it plays a critical role in helping more Americans become property owners.
Three government agencies back home loans:
- Federal Housing Administration (FHA loans)
- U.S. Department of Agriculture (USDA loans)
- U.S. Department of Veterans Affairs (VA loans)
The FHA backs FHA mortgages. They help make homeownership possible for borrowers who don’t have the budget for a large down payment and don’t have excellent credit. Borrowers with a fairly low FICO score of 580 can qualify for an FHA mortgage. With an FHA mortgage, homebuyers can finance a maximum of 96.5 percent of the home’s price. This makes it possible for someone to purchase a home with a 3.5 percent down payment. With a 10 percent down payment, someone could qualify for an FHA loan with a credit score of 500. FHA home loans require two mortgage insurance premiums: the first one is paid upfront, and the other is paid annually for the term of the mortgage if you made a down payment less than 10 percent. The mortgage insurance makes the FHA mortgage more costly overall.
USDA home loans help homebuyers with moderate- to low-income finance homes in rural areas. To qualify for a USDA home loan, you must buy a home in a USDA-eligible location and meet specific income limits. Not all USDA mortgages require a down payment for eligible home buyers with low incomes.
VA loans are a low-interest mortgage option for members of the U.S. military (active duty and veterans) and their families. One of the biggest benefits of VA loans is that they do not require PMI or a down payment. Closing costs are normally capped and may be paid by the seller or the property. Borrowers are charged a funding fee, which is a percentage of the loan amount, to help offset the loan program’s cost to taxpayers. Most of the fees and closing costs can be paid upfront or rolled into most VA loans.
Pros and Cons of Government-Insured Mortgages
Pros – Government-backed home loans offer a way to help you finance a home when you can’t qualify for a conventional home loan. Generally, the credit requirements are more relaxed, and you can buy a home with a small down payment. They’re available to first-time and repeat home buyers.
Cons – The mandatory mortgage insurance premiums can make government-insured mortgages more expensive. These loans require more documentation than conventional mortgages to prove eligibility.
Who should get a government-backed mortgage?
Government-insured loans are an excellent option for homebuyers with less than perfect credit and low cash savings who can’t qualify for a conventional loan. VA mortgages offer the most flexibility and best terms compared to other loan types.
2. What will the interest rate and APR be on your loan?
Many people focus only on the loan’s interest rate, but you also need to know the APR or Annual Percentage Rate. The APR shows a more accurate number of exactly what the loan is going to cost you each year and over the duration of the loan. You should also ask if lowering the interest rate is possible. Often borrowers can pay for discount points to get a lower interest loan.
3. What are all of the costs of the mortgage loan?
There are costs of obtaining a mortgage. For instance, points or discount points are fees that you pay to the lender on closing to secure a lower interest rate. There are usually closing costs to create the documents and fund the loan.
Other costs you may have to pay during the mortgage process are:
- Appraisal of the real estate
- Credit check processing fee
- Title fee
- Recording fees
- Home inspection fee
4. Is there a penalty for early repayment?
Paying your mortgage off early saves you money because you pay less interest during the life of the home loan. Double-check with your mortgage broker to ensure that there is no prepayment penalty for paying off your mortgage early. It is unlikely that a lender would charge a prepayment penalty, but it is best to check before committing to a home loan. These protections are the result of federal mortgage servicing rules.
5. Do you have in-house underwriters?
Mortgage underwriters are responsible for reviewing your mortgage application. They can deny mortgage applications or make conditions for approval. Some mortgage lenders have in-house underwriting, which can speed up the processing of your mortgage. Keep in mind that FHA or VA loans can take longer to process. Check with your lender about underwriting. If it is not done in-house, ask how long the process usually takes.
6. How long will it take to fund the mortgage?
Funding is a critical part of getting a mortgage. When you buy a house, the purchase contract contains the closing date. Not having funding by that date can cause serious problems, especially if you are ending a lease at your current home or have a specified move date. Check with your lender to get a clear idea of the date of funding. Work with your mortgage broker to set an appropriate closing date.
7. Is the closing date guaranteed?
Because the closing date is so important, you want to make sure that your lender will be able to meet it. Ask them if they set the closing date if it is guaranteed. If they cannot guarantee the closing date, ask for a different closing date that is further out. You don’t want to be caught at closing without funding for the transaction. This might have financial and legal ramifications.
Buying a home is not only fun, but it is also a challenging process. If you ask the right questions of your mortgage lender, you will be well prepared for the process. Constantly communicate with your lender. If something is unclear, ask questions. Contact an expert mortgage professional and learn about your mortgage options.