Conventional Mortgage

A conventional loan is a mortgage made between a lender and a borrower with no other parties involved (such as VA or FHA). Conventional loans customarily require a 20% down payment. Down payments may be as low as 5% with mortgage insurance.

Example:

  • A buyer purchases a $400,000 home. The lender requires a 20% down payment ($80,000). At 7% the $320,000 balance has a monthly P&I payment of $2,391 over 30 years. Mortgage insurance could lower the down payment requirement to 5%, or $20,000, which increases the monthly payment.

Advantage:

  • Conventional mortgages are straightforward and easy to understand.
  • Conventional loans offer the largest variety of financing options.
  • Fixed rate conventional loans feature equal monthly payments that are made over the term of the mortgage. The standard time period is 30 years or less. The interest rate remains the same which keeps the principal and interest payments the same over the term. Payments can vary if taxes or insurance escrow payments change.
  • Adjustable rate loans are mortgages that allow for payments which change periodically over the life or term of the mortgage. An ARM loan has a set interest rate and payment for a period of time and then adjusts to the market rate at a predetermined point. ARM loans feature lower rates over the initial loan period.

VA Loan

VA for the U.S. Department of Veterans Affairs.The VA is not a lender but rather guarantees mortgages for lenders to help eligible veterans. VA loans require no down payment up to the VA maximum loan limit. VA loans can be assumed by qualified borrowers.

Example:

  • A veteran purchases a $235,000 home. With no down payment the loan amount is $240,050 including the VA Funding Fee, for first time vetera purchase. At 6% interest over 30 years the monthly payment is $1,439.

Advantage:

  • VA requires no down payment. The seller can (but is not required to) pay all closing costs for a veteran.

FHA Loan

The FHA (Federal Housing Administration) is a division of the US Department of Housing and Urban Development. FHA loans are most popular amongst first-time home buyers. The FHA does not lend money. Like the VA, it insures mortgages allowing lenders to make loans that might not be eligible for conventional financing. Down payments are as low as 3.5%. Both fixed-rate and ARM mortgages are available. FHA mortgages have credit standards and other rules that are more flexible than typical conventional mortgages.

Example:

  • A buyer of a $200,000 home makes a down payment of $7,000. The loan amount including up-front MIP would be $194,930. At 6% interest over 30 years the monthly P&I payment is $1,169.

Advantage:

  • Low down payment
  • Colorado has some of the best down payment assistance programs that could possibly cover your entire down payment and help with closing costs.

Fixed Rate Mortgages

A fixed rate mortgage means that your interest rate stays the same. Your principal and interest monthly payment will not change for the entire term of the loan.
You should consider a fixed rate loan if...

  • You think interest rates could change in the near future. You secure your interest rate before they possibly go up.
  • You plan on owning your home for a long period of time, more than 7 years.
  • You prefer to have a set payment so you can set your budget

Adjustable-Rate Mortgages (ARM)

Adjustable-Rate Mortgages are those where the interest rate may change in a time period, depending on your type of ARM loan. Generally, your monthly payment could go up or down according to the index rate associated with your loan. For example, a 3/1 ARM means that in a “3” year period your interest rate is a fixed interest rate, which means it will stay the same. The “1” stands that you interest rate is subject to change one per year after the initial three years.
You should consider a ARM if...

  • If you think interest rates will go down in the future
  • You need your monthly payment to be lower for the first few years of owning a home
  • You plan to move before your adjustable rate kicks in

Make sure you have a great understanding of which mortgage loan fits your needs best! Nuvill has partnered with some great lenders in order to help guide you in the right direction during your home buying process!