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Should I Take a 30 Year Mortgage Loan?

Right now many borrowers are concerned about having jobs and where the economy is headed. With that being said, many borrowers that are planning to refinance are more than likely planning to take a 30 year loan over the 15 year mortgage. Utah residents are now seeing the effects of the housing market, and are thinking about these same issues, but battle with the thought of paying more over the life the loan than they would if they took the shorter term. The 15 year mortgage is a shorter term, but because the payments are larger, equity in the home will be built much quicker. Every family has a different financial picture, and therefore each family has to decide what is best for them.

Why a 15 Year Mortgage Is a Good Thing

Everyone knows that paying off debt faster is the best way to live life, and can boost your credit rating in the process. Life isn’t perfect and sometimes families have to go to plan B and consider the alternatives. There may be other uses or needs for that additional money that a borrower saves by taking the longer term on their mortgage, and if things are tight when buying a home than taking a 30 year mortgage is probably best.
Rates are also higher on the 30 year mortgage, and in the end the smaller payments may enable families to buy more house for a lower payment. Again, each family has different needs so deciding on what is important in a home will help make the final decision on the term of the loan. When owning the home outright is more important to a family and they have more disposable income, than they are more likely to choose the 15 year mortgage. Utah residents are anxious to build equity as soon as possible so that they can make that equity work for them. Equity in the home can serve a great purpose such as using the equity to get cash out for home improvements, or even to consolidate debt.

Financial planners usually try to get their clients to view their mortgage in the grander scheme of things, meaning that the loan should fit into a complete financial plan. The ability to save money and pay the mortgage along with all other monthly obligations is important. Ultimately, those consumers who have socked money away and have it in reserve are more likely to take the 15 year mortgage loan over the 30 year loan.

However, homeowners dealing in a real estate for the first time are advised to consult with experienced mortgage brokers who will help them get the most suitable rates and other associated fees. Fink & McGregor is one of the top Utah mortgage brokers providing you with such services.

Generally, a 15 year mortgage is chosen by homeowners who are well settled and who are usually providing a substantial down payment. Most people opt for a 15 year mortgage is for the following reasons.

Lower Interest Rates

A 15 year mortgage has interest rates which are usually lower than a 30 year mortgage or other mortgage options.  This slight difference of 0.3% in the interest rate will save you a lot.

No Retirement or House Payment Worries

As a 15 year mortgage will end sooner it will save you from worrying about your house payment or using your retirement funds being utilized for your mortgage installments once you get retired.

Faster Ownership Of course with paying installments in a 15 year mortgage you are paying faster and of a greater amount. This means that with each passing installment you are closer to owning your house. Hence, you will become owners of your house in half the time which is taken in a 30 year mortgage. However, remember that to own this advantage you are also paying higher values from your monthly income, which means reduced expenses at the current moment.

Fixed Rate for 15 years

As a 15 year mortgage is an example of a fixed rate mortgage, it means that the payment which is to be paid for the next 15 years is fixed. No matter what the country’s economic situation is or how high the rate of interest goes, you will have to pay a fixed amount for the up coming years. However, there is a pitfall here what if the interest rate falls down? Well, in that case a mortgage refinancing technique can step in for your rescue.

A variety of Options

There are a variety of options when it comes to a 15 year mortgage but some borrowers may choose to utilize a FHA or VA 15 year mortgage as a way to purchase their home.

Despite of these advantages, some people might not find these benefits as fruitful. Thus, it is better to consult professional help before undertaking a long-term investment decision like this.

Guaranteed Rural Housing Loans

The most common type of USDA loan in the state of Utah is the Guaranteed Rural Housing loan. The Guaranteed loan permits those with higher incomes to get financing as well as take advantage of 100% financing. Applicants for this loan may earn up to 115% of what other residents are earning on the average. There are income limits on USDA loans, and your mortgage expert at Fink and McGregor will go over those with you at the time you submit your loan application.

Direct Rural Housing Loans

Direct Rural Housing loans are not granted as frequently as Guaranteed Rural loans. The guidelines for the Direct Rural loans are designed for lower income families. The guidelines permit those families interested in purchasing a home, to be at 50% of the median income for families in that region. Additionally, there are income limits for the Direct Rural loans as well.

Who is Eligible for a USDA Loan?

There are still eligibility requirements in place for those who wish to apply for a USDA loan in the state of Utah. The borrower’s monthly mortgage payment, including the taxes, insurance, principle and interest can be no more than 29% of the borrower’s gross monthly income. The lender will include all other outgoing monthly debts to determine where the borrower’s debt to income ratio falls. The lender usually requires that a borrower’s debt to income ratio be no more than 41% with everything included. This means not only your mortgage payment, but also your car payment, credit cards, and any other debt that appears on your credit report. Much like FHA, who has a commonsense underwriting approach, USDA takes a similar stance. Should someone’s debt to income ratio not work, then there are other considerations that can be made which USDA refers to as “compensating factors”. These factors mean taking a closer look at what a borrower might have in their savings account in a bank, or that a borrower has paid utility bills on time. Credit is checked, and most lenders require a 620 credit score in order to get approved for a USDA housing loan.

While there is no set loan amount for USDA loans, the debt to income ratio will help determine how much borrowers can take out. The USDA loan program was designed to encourage home ownership for everyone.

The 3/1 ARM Loan

The 3/1 adjustable rate mortgage was designed for those buyers looking to re-establish credit or for those who plan to sell their home within three years. The 3/1 ARM was presented often prior to 2007, simply because many subprime loans were being done for families who had recently been discharged from a bankruptcy, or had ended a bad streak of slow payment on their mortgage or other debts. The borrower would get a lower interest for the first three years of the loan, and the following month the loan would begin to adjust. At this time, the borrower could refinance the loan with better credit, and refinance into a low, fixed interest rate. The challenge with the ARM loan is that the interest rate will fluctuate with the market, and could go up or down. When taking an ARM loan, the lender should always tell you if there is a cap on how many times and how much this loan can adjust.

The 5/1 and 7/1 ARM Loan

The 5/1 and 7/1 ARM loans are very similar to the 3/1 ARM loan in that they also have a fixed low interest rate for a set number of years.  After the five or seven year period, the loan will begin to adjust, and is generally based on one index plus a margin. Borrowers just need to decide if they want two more years of paying lower interest versus taking the five year option.

How Do I Know Which One is Right for Me?

Selecting which ARM loan is best for you shouldn’t have to be a chore, but there are a few things to make it easier for you. The first thing to remember is that the shorter the term, the lower the initial interest rate will be. Traditionally, these loans were vastly different in terms of interest rates, but with our current economy the rates are nearly the same on the three year and the five year loans.  Therefore, selecting the three year option has been less popular. There is a ten year option, but with rates hovering near the 30 year fixed, so it is really up to the family to consider whether they just want to stick with a fixed rate, or choose another adjustable rate program.

Interest rates are unpredictable in this market, and each family has a different financial picture, so it’s best to look at the bigger picture and then decide what saves each of us the most amount of money.

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The Purpose of the Home Equity Line of Credit Versus the Purpose of a Reverse Mortgage

The home equity line of credit works like a credit card, in that it allows the homeowner to access cash using the equity in their home by using a debit card or writing a check against the available funds. Anyone can apply for a home equity line of credit, but seniors or those who are of age 62 or older, and have at least 40% equity in their home are the only individuals who can apply for the reverse mortgage.

Those who are using a line of credit do so because there may be some tax advantages, whereas the senior adult that gets a reverse money isn’t concerned about tax advantages, and they are able to access their cash tax free.  When the borrower closes on a home equity line of credit, they start out owing money from day one and will typically use most of their equity. The homeowner who has a reverse mortgage will start out owing nothing, and will never have to worry about using all the equity in the home.

Why Credit Lines Are No Longer a Practical Choice

With home values falling credit lines are no longer popular. A line of credit works like a credit card, so when someone draws money from it the balance goes up. Once the balance increases and what is owed is more than the property is valued at, it puts the borrower and the lender in a bad position. The borrower is now underwater on their home mortgage and is less likely to continue to pay once they realize what is happening. With a reverse mortgage no payment is ever due until you decide that this home should no longer be your primary residence.

There is also now a newer option, known as HECM, which stands for Home Equity Conversion Mortgage. This is one of the types of reverse mortgages available to residents in Utah. Reverse mortgages allow greater flexibility for the senior homeowner that aligns with their financial needs. The homeowner can choose to receive their payments as a line of credit, monthly payments or even a lump sum. This mortgage provides supplemental income to those who may be receiving social security, and it won’t prevent seniors from receiving these monies.

Fink & McGregor will walk you through all the options so that you understand why the reverse mortgage would be the best option for your financial needs.

Conventional Mortgages and Credit Scores

Most conventional lenders in 2010 required that borrowers had a credit score of 680 or higher in order to qualify for a loan that was 90% of the home’s value. Most FHA lenders require a borrower to have a credit score of 640 or higher, so you can see the differences between the two. Conventional mortgage loans require anywhere from 5% to 30% down for a purchase loan, depending on the credit score as well, whereas FHA programs allow borrowers to put as little as 3.5% down with a credit score of 640 or higher. There are major differences between these loans, but it’s important to understand what your credit is like so that you know what type of mortgage you can qualify for. In general, the higher your credit score, the better the mortgage rate.

Your Credit Report

It is important that prior to refinancing or buying a home, that you get a copy of your credit report so that you can review it in detail and make sure that everything on it is accurate. Finding errors on your credit report and getting it fixed could change your offers significantly. Checking your credit report can also alert you to any new accounts that were opened in your name that you were not aware of. Also, it is important to double check all of your pay histories on all accounts you have. As you pay your bills keep documentation showing that you paid them so that if anything needs to be corrected you have the proof that payment was made. All lenders love to see on time payments, and lenders are nervous right now that mortgages won’t be paid on time.

FHA also views your credit report very seriously, and uses it as a glimpse into your thoughts on how bills should be paid and whether or not they are important to you. FHA does have a different approach to underwriting loans, so this is why their guidelines on credit scores are a little different as well. Even when a borrower has no score, FHA can use what they call “compensating factors” to help pull the loan together. This could be pay histories from utility bills, cell phone bills and other recurring payments.

The top credit score tier ranges between 740 and 850, and when lenders see these types of scores they are going to offer the lowest interest rates. Traditionally, scores of 620 or less were viewed as subprime, and with higher rates for these borrowers it would be wise to clean up your credit so that you can save money on any loan you get.