Mortgage matters

I watched "Inside Job" last night with our good buddy Matt Damon narrating. If you haven't seen it, it's worth a watch. As with anything, you do have to use your brain and recognize it is most certainly and purposefully slanted against big finance. You need to take the bias into consideration while watching. That said, it's no secret their greed toppled the global economy and created the massive, global meltdown we all experienced back in 2008. As someone who is diving into home ownership, it was well worth the watch.

Even with my awareness on high alert, I'm still excited to dig in and stop "paying someone else's mortgage" with my rent payments. Today I want to take a quick cruise through the options available to us as homebuyers. In the wake of the "challenges" of the early 2000s, it is safe to assume your finances will be more closely scrutinized. The good news is that there are a handful of great options available to buyers with varying levels of credit and down payment capacity. Let's check them out.

The first and most common is the fixed rate loan. This simply provides the same, single interest rate for the life of the loan. These loans are typically 15 or 30 years. It is great for folks who have no intention of moving for the next (at least) 5-10 years. One of the primary benefits of this loan is the variations in the national interest rate have no bearing on yours or your payments. While you may lament those rates if they fall (as they are now), you'll be celebrating when they trend in the other direction. For both of the properties I purchased, this was the path I chose.

The next option is the adjustable rate mortgage. (FWIW, I'm going to use "mortgage" and "loan" interchangeably for the remainder of this article.) The most obvious difference between these two is that the fixed rate you were enjoying above has gone away. Typically, about once a year, your loan's interest rate will be adjusted based on the current national interest rate. Quite obviously, this is great when they fall, but a little challenging if and when they rise. These types of loans also tend to have lower initial interest rates. This is safe for the lender since they know they will "catch up" with the first adjustment. "The ARM is a great option for buyers who are anticipating relocating within the first 5 years of ownership," notes Badger Realty agent, Michele Jordan. "If plans change, these owners frequently refinance into a fixed rate to take advantage of the stability those loans provide," she continued.

FHA or "Federal Housing Administration" loans are fantastic for folks (like yours truly) who don't have a ton of savings to pony up the 20% typically required of standard loans. While there are some restrictions, borrowers can put as little as 3.5% down for the home. This is because they are government-backed and are considered "safer." Some of the restrictions include a maximum loan amount of $417,000 (don't ask my how they came up with that number), they are fixed rate loans for the standard 15 or 30 years, and the borrower is required to pay PMI (Private Mortgage Insurance) at least until there is suitable equity in the home.

If you have served in the military, a VA (Veterans Affairs) loan is a suitable option for your purchase process. The primary (and amazing) benefits of this loan include no down payment and no need for PMI. There are some strict guidelines for the home you purchase. It needs to be your primary residence (no second homes or vacation homes) and it needs to meet some "minimum property requirements." That simply means you won't qualify for that fixer-upper you were hoping for. If you have served our country, we thank you and our mortgage industry thanks you!

USDA loans are another great, creative option for buyers looking to purchase a home in rural areas. If you are new to New Hampshire, we are flush with rural areas! These loans are also government backed so there is no down payment required. There are also very attractive interest rates included in these loans. While you are required to pay PMI, the pros certainly outweigh the cons with these. There are some restrictions with regard to your debt to income ratio. In a nutshell, your debt cannot exceed your income by more than 41%. If you are struggling financially and are looking to buy property where your closest neighbor is a moose, give this option a close look.

The last, and slightly less prevalent, loan we will cover today is the bridge or "gap" loan. This is for those folks who are a bit stuck between buying their new home and still not having sold their existing home. You cannot finance more than 80% of the cost of the two homes combined, so you really need to be flush with cash or have plenty of equity in your existing home for this bad boy to work for you. You also need to have pretty solid credit and a healthy debt-to-income ratio to be approved for this one.

There are a plethora of financing options available to home buyers these days. If you are considering buying a home or maybe have already started looking, I strongly suggest you re-visit with your lender (or keep shopping for one!) and explore all the options available to you. You might be very surprised at what you can afford.