Deciding Between a 15 Year and 30 Year Mortgage

Many borrowers believe that the most important question when buying a home is “Where should we live?” In reality, this is one of the last questions that borrowers should ask. One of the most important questions borrowers need to ask themselves is “30 year or 15 year mortgage?” Utah residents find that choosing isn’t always easy; many borrowers aren’t sure why it is important, so we will cover that information here in this article.

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.

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15 Year Mortgage

A 15 year mortgage is best suitable for homeowners who are willing to own a house in half the time and are ready to opt for a faster track of repayment when compared to a 30 year mortgage. The accelerated payments of a 15 year mortgage will help you get rid of your loan much faster. Moreover, you will pay substantially less interest over the life of a loan when compared to the more common 30 year mortgage.

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.

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USDA Rural Housing Mortgages in Utah

The USDA, or the United States Department of Agriculture, helps families around the country get into low-cost insured homes. Many times those who are interested in taking out a USDA mortgage loan have zero down. These loans have many benefits including low closing costs and no mortgage insurance added to the payment. Additionally, USDA loans are always a fixed rate loan so applicants can have peace of mind that their monthly payments will always be the same. There are two types of USDA loans available in some areas of Utah now. These loans can be taken out on various properties including condominiums, single family homes, mobile homes, and homes that are part of a development.

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.

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The Different Types of Adjustable Rate Mortgages

An adjustable rate mortgage or ARM for short is a mortgage that will have a fluctuating payment. There are still a number of ARM loans being done in the state of Utah; 3/1, 5/1, 7/1 adjustable rate mortgages are available through Fink and McGregor. Many who have short term housing conditions or are planning to sell their home within a few years may all wish to consider this type of loan. Those who are also looking for a jumbo loan may also consider these adjustable terms.

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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Home Equity Lines of Credit Versus a Reverse Mortgage

Many borrowers have used equity lines of credit in the past in order to take cash out of their equity to make home improvements or pay unexpected bills. With falling home values homeowners are losing confidence in this option, and reverse mortgages are becoming more popular and giving homeowners other options in the state of Utah. Reverse mortgages were designed to help the owner keep their home, and use the equity without having the fear of ever owing more than the home is valued at. While the reverse mortgage is still a home loan, there are some significant differences between the home equity line of credit and the reverse mortgage.

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.

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Mortgages and Credit Scores

These days credit is everything, and without good credit a mortgage loan can be tough to qualify for. Mortgages and credit scores go hand in hand, and not only do they help you get an approval, but they can help you get the best interest rates available today. Being able to obtain a mortgage at one percentage point less could result in significant savings of $5,000 or more. In order to understand why mortgages and credit scores are so important, there are a few things you should know.

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.

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What Are Mortgage Points and How Do They Impact My Mortgage?

There are many consumers that talk about not wanting to pay points, but many of them are not sure what “points” really are. When something sounds bad, nobody wants it and that includes paying for something that they aren’t aware of or that costs more money than they thought. It’s important to understand the different types of points, and how they are factored into your loan so that you know exactly what you are paying for. There are two different types of points when it comes to your mortgage loan and understanding how they are different and how they can impact your tax deductions is important.

What is a Point?

A point actually means 1% of the loan amount, so if your mortgage loan is for $175,000 then 1% of that loan amount is $1,750, and 2% would be $3500.  A lender may charge anywhere from 1 to 2 points, and if you see this on the Good Faith Estimate it’s important to ask upfront why it’s there,  and how this will affect the cost of your loan. There are two names for points that could be included in your mortgage loan; discount points and origination points.

What Are Discount Points?

Discount points are a term used by the lender to describe what you might pay in order to reduce the interest rate on your new loan. What appears in the discount block of the Good Faith Estimate is also considered prepaid interest, because it’s paid in the closing of the loan. Borrowers can pay no points if they wish, or they can pay as many as four to get the interest rate lowered. The good news is that these discount points paid may be tax deductible. As always, it’s best to speak with your tax professional about this.

What Are Origination Points?

The term origination points, is also known as origination fees, and is the fee the lender charges for doing the loan. In some cases, the origination fee may be tax deductible if it was not used to pay other fees that are typically included in a mortgage loan.  The IRS states that any fees must be itemized, but as always consult a tax professional on this as well if there is any question.

When buying a home, it is up to you to decide whether or not you have enough money to put down, or if paying points is a better option. With the right mortgage professional this should be an easy question to answer. Those who are looking to put down the lowest amount of money possible should consider not paying points at all. It typically takes a borrower around five years to recoup the money that they pay on the points, but it depends on the loan amount and how long that borrower wishes to keep the home. When someone decides they will be in the home for five years or more, that is pretty significant, and paying the points would in this case save the borrower money.

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When Should I Lock My Mortgage?

When refinancing or buying a home, everyone wants to get the absolute lowest rate they qualify for. Rates change daily, so with that in mind how does anyone know when the best time is to lock in their interest rate? A mortgage rate lock is an important part of the loan process and without locking the rate in, you could be subject to paying a higher rate than is necessary.

A Mortgage Rate Lock

If you don’t lock in your mortgage rate than your rate will “float”, meaning that it changes every day depending upon a variety of factors such as the stock and bond markets and recent economic news. The only way to stop your mortgage rate from going up and down is to “lock” your rate. When you lock your mortgage rate, you will select a specific amount of time for your rate to be locked – usually 7, 15 or 30 days. Once you lock your rate, you must close and your loan must fund before the end of your rate lock or the lender will penalize you with additional fees in addition to giving you the prevailing mortgage rate – which could be higher.

What to Consider When Locking a Loan

Your mortgage rate lock is comprised of three important things: the interest rate, points, and the duration of the loan lock. Each rate lock has a specific time period in which the loan should close, and if not then the rate lock will expire leaving the borrower subject to new interest rates. Borrowers may be able to get an extension on the loan lock; however extending the lock will have a fee. When a mortgage loan gets funded at a rate that is lower than what the market calls for, than the lender will lose money. This is why they charge the fee when the lock has been extended. This is why experts in the field of real estate always suggest that borrowers go ahead and get their interest rate locked in. Peace of mind is a great thing to have when making big decisions involving your home.

There really isn’t anything to lose when locking in your interest rate. While rates change on a daily basis, they have also been known to change hourly. Should you find that the rate only drops  1/8 of a point from the time you locked the loan, then there really won’t be a significant difference in the payment.

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