You’re ready to buy a home, but what do you qualify for? There are many options available to explore when finding the right loan product for your financial needs and goals. Here are some things to discuss with your loan officer.
FHA vs. Conventional with PMI
If you’re planning to purchase a home with less than a 20% down payment, then you’ll need mortgage insurance. A conventional loan with private mortgage insurance (PMI) paid monthly is the better option for most people, as it can be removed from your loan after a few years of timely payments. However, an FHA loan, insured by the Federal Housing Administration, makes home ownership a possibility for more Americans that have below-average credit scores. An FHA loan requires an upfront mortgage premium and monthly mortgage insurance and, unless you meet very specific criteria, is likely to last the lifetime of the loan, or until you refinance to a conventional loan.
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover periodic charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. These payments will be paid to your lender and on your behalf, your lender will make these payments to your home insurance provider, your county treasurer-tax collector, or your private mortgage insurance provider when they’re due. You can choose not to have an escrow account, and then you’ll be responsible for saving for those costs throughout the year on your own, and making the direct payments for your property taxes and to your insurance providers.
Fixed vs. Adjustable Rate
The interest rate on your loan determines your monthly payments. A fixed-rate loan provides loan payments that stay the same over the lifetime of the loan. However, adjustable-rate loans can have a lower initial interest rate and loan payment for the first five, seven, or 10 years of the loan. Then, after the initial period, the rate can change every six months or each year, depending on the details of your loan. This can end up resulting in an increase, or possible decrease, in interest and monthly payments as the loan ages. There are some instances where a loan with an adjustable rate might make sense for you. It’s important to speak with your lender to understand your options.
Points, also known as discount points, allow you to lower your interest rate by prepaying some of the interest. Each point you pay for equals 1% of the total loan amount and reduces the interest rate charged on the loan. Some cases in which buying points might make sense include if you’re planning to be in the home for a long period of time and you’re not planning to refinance soon. Your lender can help you compare the points and rate options to decide which option is best for your needs.
Is Orange County’s Credit Union the right fit for you? With us, you can request a Total Cost Analysis to give you clarity on all of your loan options. We offer competitive rates and your loan is handled in-house for a faster closing. Call our Mortgage Loan Department at (800) 506-5070 or request an appointment with one of our Associates to discuss your options.