If you’re just starting the home buying process, or it’s been a while since you purchased a house, mortgages can seem pretty scary. What kinds of home loans are available? What is an ARM, and why does it matter? What is the difference between an FHA, VA, and USDA/RD loan?
(Also, what’s with all of these letters? Did someone knock over a scrabble board?)
Fortunately, Grand Rapids mortgages aren’t rocket science. So what do you need to know, and what should you look out for?
1. Fixed Rate vs. Adjustable Rate Mortgages
Let’s start with the difference between a fixed-rate home loan and an adjustable rate mortgage (ARM).
First, understand that mortgage terms are long. They are usually 10, 15, or 30 year agreements to pay back the loan, and you are charged interest until the mortgage is paid off.
With a fixed-rate loan, the interest will stay constant. So, if you agree to a 5% interest rate, you will pay the same amount in Year 1, Year 12, and Year 27. Your rate cannot go up.
However, with an adjustable loan, your rate can (and likely will) change over time.
Most ARMs are fixed for a set period of time. For instance, if you have a 5/1 ARM, you will have a fixed rate for the first 5 years. However, after that, it may change every year.
As an example, if you start with a 5% interest rate now, you will have that same rate in Years 1, 2, 3, 4, and 5. But in Year 6, it could rise to 6%, or fall to 4%. In Year 7, it could jump to 8%, or go back to 5%.
ARMs usually offer lower initial interest rates, but you don’t get as much certainty in your loan terms. You have to determine which option is best for you.
As of this writing, in March of 2016, interest rates are relatively low for a Grand Rapids mortgage. As a result, you may want to lock in current rates, since they are likely to rise in the future. To compare today’s rates to previous years, see this historical chart.
2. Conventional vs. Government-Insured Loans
Conventional mortgages are loans offered by financial institutions (such as banks and credit unions). The terms vary based on the market, but traditionally, they require a larger down payment (10% – 20% is common).
These loans are not subject to any additional government requirements, such as income limits, geographical area, or veteran status. It is relatively simple. If you (the borrower) and the house meet the lender’s requirements, you are good to go.
Government-insured loans offer additional protection for the lender. Most of these programs reimburse the lender for any losses in case the buyer defaults. Since this reduces the lender’s risk, they are often able to offer more buyer-friendly terms.
FHA Loans
The Federal Housing Association (FHA) offers a mortgage guarantee program, which is managed by the Department of Housing and Urban Development (HUD). All types of borrowers can apply for FHA loans.
Because of the additional protection this program offers for lenders, buyers get added benefits. Your down payment can get as low as 3.5% with this program, which makes it an attractive option.
However, your monthly costs will be higher. You’ll be paying back a larger loan, and the government will require that you also pay for mortgage insurance. Consider the costs carefully before committing!
VA Loans
The Veterans Association offers an excellent mortgage program to our veterans. The VA is willing to reimburse lenders for any default by qualifying buyers, and in many cases can insure 100% of the loan.
As a result, veterans can qualify for a $0 down payment. Don’t go running in to the bank though… there are additional requirements. Be sure to refer to your local VA office for more information!
RD Loans
The US Department of Agriculture (USDA) offers a loan program for buyers in more rural areas. Many parts of West Michigan qualify geographically, so if you’re looking for a Grand Rapids mortgage, check if your home is in an eligible area.
Rural Development loans are not available for all buyers. Applicants must have steady income, but cannot exceed a set income cap. To check the requirements, visit the USDA income and property eligibility site.
If you and the house both qualify for an RD loan, you may be able to move in to your home for $0 down.
Conclusion
A Grand Rapids mortgage doesn’t have to be scary. There are many types of home loans available, and you may qualify for some great programs.
Use this guide as a starting point. As always, do more investigation on your own, and refer directly to mortgage professionals, accounts, and the appropriate government departments for more details. However, don’t be afraid to dig in… there are some great benefits waiting!