Mortgages and Interest Rates, Where to Even Begin?

Paying for a home is the most important component in actually being able to buy it. Depending on what type of loan or mortgage you are taking out, the down payment can vastly change. The bigger the down payment, the less your monthly mortgage payment will be, whose components can be broken down into the acronym (PITI). The mortgage process can be confusing, but the right one, absent of predatory lending, can kickstart you into building equity in your property. 

Mortgages can be separated into conventional and unconventional loans, conventional being those that are offered by private lenders such as banks, and mortgage companies which have to comply with guidelines that safeguard against disadvantageous lending.

Unconventional loans are those supported by a government entity such as the VA or the FHA. Conventional loans usually have a higher down payment but can range anywhere from 3-20%, with anything under 20% requiring private mortgage insurance to ward against the homebuyer defaulting on the loan.

Unconventional loans on the other hand may have down payments ranging from 0%-3.5% and are more appealing to those with lower credit scores that may have a harder time qualifying for a conventional loan. The USDA even offers an extended 38 year loan which they offer to those in extremely rural areas who may need extra time to pay it off. 

Mortgages can also have fixed or variable interest rates depending on the type of loan you get, which can affect the cost of those monthly payments. Those fixed rates are just that, fixed. This means that included in your payments, the interest aspect of the PITI breakdown will remain the same for the life of the loan.

Refinancing can change this, but for the sake of this article I won’t get into that. The rate you start your loan with is the rate you end it with, which can be more unfavorable depending on the time frame of when you enter into the loan. For example, in recent times, rates have skyrocketed and reached into the 6% range, making the goal of homeownership harder to reach due to the steep payments that have to be made. 

Variable interest rates on a mortgage, also referred to as an ARM (adjustable rate mortgage) fluctuates based on the index and can be riskier due to the unpredictability nature of the market and the possible raising of rates.

In this case, the beginning of the loan can face a lower interest rate for a period of time before changing to reflect the index, where it can either stay relatively low or go up and increase payments. This is more of a gamble and can sometimes get homeowners in over their heads if they just expect that low rate for the life of the loan. 

Over at Urban District Realty we aren’t mortgage professionals, and we would recommend that you seek out the advice of one to make an informed decision on the one you end up choosing for your home purchase. While we can’t help you choose a mortgage, we can recommend you to seasoned professionals who will put your best interests first.

We however, can connect you with your dream home and assist you throughout the buying process to take that added stress off of your shoulders. The more informed you stay, the easier it will be to handle so many moving parts, especially when you have a team of professionals that have your back.