• According to the Mortgage Bankers Association, new
residential mortgages are expected to drop in volume by
about one quarter compared to last year.
• As interest rates stay low, more people are getting ready
to purchase a first home. Homeowners who take time to
understand their mortgage options are bound to enjoy the
best long-term deals when it's time to buy.
• Here's a look at the workings of the most common
mortgages on the market.
• Homebuyers with credit scores over 620 and a down
payment ready are eligible for a fixed-rate mortgage,
which can be anywhere from eight to 30 years in length.
• Most of these mortgages are sold to Fannie Mae or
Freddie Mac because banks prefer to avoid holding onto
these loans for so long. As credit scores go up, fixed-rate
mortgage terms improve.
• At minimum, homebuyers choosing fixed-rate mortgages
can expect to pay 3 percent of a home's value in cash, but
20 percent is necessary in order to avoid paying mortgage
• Many homebuyers prefer these mortgages because after
signing, a home can be enjoyed for decades without
worries about rates increasing.
• In some cases, a fixed-rate loan term can be halved
simply by choosing bi-weekly payments rather than
• Compared to similarly sized fixed-rate mortgages,
adjustable-rate mortgages often start with an interest rate
about 1 to 2 percent lower.
• For many homeowners, this means that higher-priced
homes become options because they can put a larger
proportion of savings toward a down payment instead of
• However, these advantages come with potential
drawbacks. Adjustable-rate mortgage interest rates are
dependent on the state of the market, so they can change
• Although some homeowners ultimately pay less interest
by choosing an adjustable-rate mortgage, most end up
paying more in the long term.
• Homebuyers with credit scores that are less than optimal
can opt for subprime mortgages.
• This lower credit score, normally below 600, is viewed as
risky by lenders, prompting them to charge interest rates
higher than those used for prime lending. Down payments
over 30 percent are common for homebuyers who opt for
• Federal Housing Authority loans, usually called FHA
loans, require a minimum down payment of 3.5 percent of
• Mortgage insurance is always required, but its rates are
locked in upon closing.
• FHA mortgages are especially popular among
homebuyers have a smaller down payment, a credit score
of at least 640 and few opportunities for other types of
• Veteran's Administration loans are, as the name
suggests, intended only for veterans. Veterans can get a
certificate of eligibility online, in the mail or from a lender
and enjoy a loan with excellent terms.
• For example, mortgage insurance is not required even for
VA homebuyers who lack a down payment.
• These are some of the most common types of mortgages,
but they are not the only options available to homebuyers.
• To learn more, prospective homebuyers should speak
with a mortgage broker.
• In addition to providing information about loan options,
mortgage brokers can help consumers determine which
terms best match their lifestyle, expectations and credit