Choosing the Best Florida Mortgage

So you want to buy a home. You need a mortgage in order to make that happen. That much you probably have figured out! It gets a lot more complex, however, with more mortgage variations and options than you probably knew existed. Below, Florida Home Loan will analyze each of the most popular types of mortgages to help you break down your situation and see what works. After all, a number of the options below might work for you, but that’s not good enough. This investment may be the most important of your entire life, so it’s imperative that you settle for nothing less than the best option possible.

Generally, mortgages are divided into two groups - fixed-rate and adjustable-rate loans - with a number of variations thereof. There also exist options for special groups, such as senior citizens and Armed Service veterans. We will get to all of this briefly. In the interest of making the math easy and uniform, let’s say you are buying a home that costs $250,000 and are prepared to spend $50,000 (or 20 percent) on a down payment. Therefore, you are borrowing $200,000. Got it? You can potentially borrow more than this or make a smaller down payment, of course, but we’ll stick with these standard figures for now.

Fixed-rate mortgage / 30-year
By far and away the most common mortgage issued in Florida and beyond. With a 30-year, fixed-rate mortgage, you are given the same interest rate for the duration of your loan. Rates may fluctuate, but yours will always be locked at the figure you initially agreed to. Secure and consistent, these loans offer stability and it is easy to see why most people opt for them. If you plan on being in your home for a number of years, this is probably the easiest, low-risk choice.

With an interest rate of 6.0% (the national average, approximately), a 30-year, fixed-rate loan would result in a monthly payment of $1,205. Again, this will be the payment as long as you own the home, so you can enjoy that security. Plus, if rates fall nationally, you will still be able to refinance, which we will discuss at length in a later section.

Fixed-rate mortgage / 15-year
Like the 30-year variety, these fixed-rate loans will offer the security of the same interest rate and monthly payment throughout. The difference, obviously, is that you’ll be done paying it off in 15 years as opposed to 30! We would all like to be out of debt in 15 fewer years, but unfortunately, that will mean a lot more money to pay each month. Borrowing $200,000 is a massive undertaking, after all.

However, there is a definite upside. Because you are perceived as less of a risk to the lender when you choose the 15-year fixed-rate loan, you will be given a better interest rate (usually around 0.25% lower). Let’s say that knocks your rate down from 6.0% to 5.75%. Your monthly payment on a 15-year fixed-rate mortgage is going to be $1,668. In other words, a lot more. However, you’ll be done paying it off sooner, and a smaller percentage of your money will go towards interest. If you are in a financial position where this option is possible, it certainly merits consideration.

Fixed-rate mortgage / 40-year
A relatively new option that is gaining strength in many of the nation’s housing markets, a 40-year fixed-rate loan is basically the opposite of its 15-year counterpart in terms of its pros and cons. Because you are spreading the payments out over a greater length of time, they will decrease in size. However, your interest rate will rise with the increased risk to the lender.

Assuming your rate climbs to 6.25%, the monthly payment on your 40-year, fixed-rate mortgage of $200,000 equates to $1,141. Although you will be barely making any headway in terms of paying off your principle with a 40-year loan, it’s better than nothing. With an interest-only mortgage, which we will discuss below, you are making no dent whatsoever.

Adjustable-Rate Mortgages (ARMs)
With housing prices skyrocketing in the past five years, more and more buyers have chosen to go this route. Unlike fixed-rate mortgages, the initial APR is not guaranteed for the length of the loan. As a reward for taking a risk, adjustable-rate mortgages offer you a rate that is, initially, much lower than what a fixed-rate loan would grant you. However, when the fixed-rate period (a pre-determined term, generally one, three, five or seven years into the mortgage) comes to an end, your rate climbs to whatever the current interest rates may be.

Because prices are so high, these loans have enabled countless buyers to stretch their budgets just enough to secure the home they desire. Lower interest rates are significant, especially with such huge sums of money at stake, and the risks of an adjustable-rate mortgage can be largely averted if you don’t plan on remaining in the home beyond the pre-determined period. So let’s look at how this impacts payments. If you choose a 5/1 ARM (a loan with a 5-year period of lower interest, after which the rate will return to the 1-year average of the LIBOR index) you’ll have what is essentially a 30-year loan at a 15-year rate. You’re paying off the mortgage over 30-years, but your rate of 5.75% is lower than you could normally receive.

As a result, your payment comes out to $1,172.

Interest-Only Mortgages
Another option that has become increasingly common with the rise in housing costs. With a conventional mortgage, your monthly payments consist of both the principal (the amount you are borrowing) and the interest (the amount tacked on by the lender to make it worth its while). With an interest-only mortgage, the principal payments are removed from the equation. You pay off only the interest. Make sense? This option is similar to the adjustable-rate mortgage in that it gives you an advantage up front. They are usually customized versions of ARMs, in fact. Not only do they carry lower rates than do 30-year loans, but you will find that without the principal, your payment really drops.

Many people have gotten in over their heads with this method, though. After all, when the pre-determined interest-only period ends, the payments are going to go through the roof. Compare this to the 5/1 ARM we described above. Because the lender is assuming more of a risk, your rate will be slightly higher (usually about .125%). Let’s assume you are given a 5.875% rate. With an interest-only, 5/1 ARM, your monthly payment will only be $904. Appealing as it sounds, remember that you are just deferring that money. There is no equity being built, either. If you remain in your home longer than the pre-determined period, the ensuing jump in payments may prove costly.

Option ARMs
Another variety of the ever-popular adjustable-rate mortgage is what is known as an option ARM. Also called a flexible-payment ARM by some lenders, it gives you the opportunity allows you to select your payment type each month. You get to choose between the following:

• 15-year.
• 30-year.
• Interest-only.
• Minimum payment.

At this point the only option we have not gone over is the minimum payment, in which you are allowed to pay less than the amount you actually owe and have the difference applied to your loan. Assuming a minimum payment of 1 percent, you could get away with a monthly payment of $667. We are getting smaller and smaller with these amounts - but remember, you could end up paying a heavy price for this down the road. The money you save is going to be applied to your loan and accrue debt, and the more you defer, the higher your balance will ultimately be.

Reverse Mortgages
An option used primarily by seniors, this type of mortgage allows for the greatest home equity conversion. You remain the owner of your home, just like you would with a standard or “forward” mortgage, only you are turning its value into cash. Seniors on fixed incomes and in need of extra cash can therefore benefit from the equity they have accrued over the years. The borrower is, of course, still responsible for paying property taxes, homeowners insurance and any property repairs. All advances, plus interest, must be repaid when the loan exprires as well. For a more comprehensive guide, visit the AARP page dedicated to this increasingly popular option.

FHA Loans
FHA loans are mortgages that made by conventional lenders, but are insured by the federal government. The Federal Housing Administration (FHA) is a government subsidiary of the Department of Housing and Urban Development (HUD) and has always served to stimulate housing and economic growth in depressed communities. It strives to provide adequate home financing by insuring mortgages, and to provide stability for the mortgage market. It plays an active role in emergency management as well, as demonstrated recently in its offers to assist the housing needs of hurricane victims.

Regardless of the situation, FHA loans offer a chance for more people to purchase homes than do conventional mortgages. The FHA provides a means of receiving up to 97 percent financing for most residential mortgages as long as basic credit requirements are met. While an FHA mortgage is a very popular path for the first time homebuyer to take, since it requires so little money up front, it is not strictly reserved for first-time buyers. You can only have one FHA loan at a time, but you can exercise this option whether you are in the market for your first home or your eighth.

The basics:

• The FHA insures the loan, thus limiting the lender’s risk.
• The borrower pays upfront insurance premiums equating to approximately 1.5 percent of the loan amount (money that can be financed directly in the loan amount).
• The borrower also pays a monthly premium of 0.5 percent of the loan amount divided by 12 months.
• FHA requires down payment of 3.0 percent. This money can be a gift.
• Borrowers must provide proof of sufficient income to show ability to pay the mortgage, but credit requirements are more relaxed. Bankruptcies and past financial problems will not preclude you from eligibility.

VA Loans
The United States Department of Veterans Affairs guarantees these special mortgages to those who served our country. Generally, if you spent six years or more in active duty, you will be eligible for some form of participation in the VA Loans program. There are fewer fees involved, and the benefits of VA Loans generally include:

• No down payment
• Fewer penalties for bad credit, greater eligibility for low interest rates.
• No monthly mortgage insurance is required with a VA home loan, even if your Loan-to-Value (LTV) ratio is 100 percent.
• Recently, the amount available to borrow was increased to $359,650, still with no down payment required
• VA mortgages are often assumable.
• As part of a hybrid ARM product, veterans now have a choice of a fixed-rate or an adjustable-rate VA loan.