You’re navigating the buying process and are looking for your first home mortgage in DC. As we know how stressful this process is, this discussion will explore 4 options to that you have while searching for financing.
While we can’t decide which home is best for you, we can help you make informed decisions, specifically on the best way to finance your home. Whether it’s your first home, or you’ve gone through this before and just need a refresher, let’s get started.
Fixed Rate Mortgage
Fixed rate mortgages are one of the most common types of mortgages for those looking to buy a home. A Fixed Rate mortgage refers to loan with an interest rate that does not change over the lifetime of the loan.
Pros
So why are fixed rate mortgages most popular? Fixed rate mortgages are the go-to because they provide predictable and budget friendly payments for borrowers. Since the interest rate on the mortgage doesn’t change, the payments will consistently stay the same, barring any changes to taxes and insurance premiums that may be rolled into the mortgage, allowing the consumer to budget without any unexpected changes in their payment.
When deciding on a mortgage, the most likely loan terms will be 15 or 30 years. So, when speaking about the most popular mortgage, we are talking about the 30 Year Fixed Rate Mortgage and is such because it allows for a lower monthly payment with the loan payments spread out over 30 years while also leaving the flexibility for a borrower to make additional payments on their mortgage at any time for those looking to pay off their loan quicker. The 15-year mortgage, while still popular depending on borrower, is less so because they are more difficult to qualify for. The 15-year mortgage comes with higher monthly payments but can also be cheaper in total compared to the 30-year due to less interest being paid over the life of the loan.
Cons
Despite being the most common type of mortgage, fixed rate mortgages can sometimes be difficult to qualify for depending on the market conditions. When interest rates are high, it becomes more difficult to qualify for a fixed rate mortgage as the high interest rate leads to a higher monthly payment. When interest rates are high fixed rate mortgages can sometimes be locked into a higher interest rate than its Adjustable Rate Mortgage counterpart and while refinancing is always an option to lower your rate, it is entirely possible that a 30 year fixed rate mortgage will be more expensive over its lifetime than a 30 year Adjustable Rate Mortgage.
Adjustable Rate Mortgage (ARM)
Adjustable Rate Mortgages (ARMs) are a type of loan where, opposite to the Fixed rate loan, the loan has an interest rate that varies throughout the life of the loan. Often on an ARM the interest rate is fixed for the first few years and is then periodically adjusted based on market conditions for the remainder of the loan.
Pros
As you look to secure your first home mortgage in DC, one of the benefits of an ARM is that the first few years of the loan are often cheaper than that of a Fixed rate loan, that means if you plan on moving or selling your house within a few years, you could benefit from the cheaper monthly payments on an ARM. If mortgage rates fall, you could even see a decrease in your monthly payments.
One of the downsides that we’ll speak about shortly is the uncertainty of the interest rate on an ARM. ARMs have adjustment periods where the interest rate on your loan is adjusted based on market conditions. While this can be unnerving, ARMs have several types of interest rate caps that limit the amount that your interest rate can move in a given adjustment period so that your interest rate doesn’t move drastically in one direction or another. These interest rate caps are; an initial adjustment cap that limits the amount that interest rate can adjust after the fixed rate period is finished, a subsequent adjustment cap that limits the adjustment that can be made to the interest rate in each period after the initial adjustment and lastly a lifetime adjustment cap that limits the total amount that the interest rate can change over the lifetime.
Cons
Unfortunately, while an adjustable rate mortgage can be beneficial in lower/decreasing interest rate environments, an ARM can also see its monthly payment increase if interest rates are rising. Opposite to the fixed rate mortgage, the variable rate will consistently adjust its interest rate during each adjustment period for better or for worse. Because of this, the 30 year variable loan, while it could be cheaper than the 30 year fixed rate loan in total, it also comes with more uncertainty and the inability to plan for future payments especially those 20+ years away when market conditions may look drastically different.
Conventional Mortgage
A conventional mortgage is a loan that is not insured by the federal government. Lenders view conventional loans as riskier due to them not being backed by the government and because of this, they have more strict qualification requirements.
Pros
Conventional loans, despite their strict requirements, can be quite beneficial for those with exceptional credit history and the capital for a 20% down payment. Depending on the borrower, conventional loans can sometimes have higher credit limits than a Federal Housing Administration Loan (a type of loan we will talk about later) and for those that that are able to afford the 20% down payment, they can avoid paying for both monthly PMI and the upfront mortgage insurance fees that can be found in other types of loans.
While conventional loans are more difficult to qualify for, they are actually less restrictive than other types of loans. Government backed loans often have strict requirements on the type of house that can be bought, the amount of money that can be lent and sometimes even restrictions on the location of the house that you are looking to buy. Conventional loans on the other hand don’t come with any of these restrictions as long as the borrower has the capital and the credit history to qualify for a loan.
Cons
Conventional mortgages have more strict credit requirements and borrowers often need a minimum credit score of 620 and up to a 20% down payment on the loan to qualify. For those looking to qualify for a conventional loan but are on the lower end of the credit requirements, your loan will likely come with a high interest rate and in turn, a higher monthly payment.
Depending on the applicant, lenders may accept as little as 3% for a down payment on a conventional loan, however anything less than 20% will be require the borrower to purchase Private Mortgage Insurance (PMI). Since conventional loans are not guaranteed by the government, private mortgage insurance provides protection to the lender in the case that the borrower stops paying on their loan. Private mortgage insurance is paid for by the borrower and is most often paid for by adding a monthly premium onto the mortgage payment but can sometime be paid with an up-front premium at closing.
Federal Housing Administration (FHA) Mortgage
Opposite to the conventional mortgage, an FHA is a mortgage that is insured by the federal government and specifically the Federal Housing Administration, as its name suggests. FHA loans are offered by FHA approved lenders and due to their relaxed requirements are the most popular choice of first-time home buyers or buyers with lower annual income.
Pros
FHA loans, due to the fact that they are backed by the federal government, have more lenient qualification requirements as lenders are more likely to lend out money to those with a weaker credit history because the loan is being guaranteed by the government.
Borrowers with credit scores of 580 or higher can qualify for a loan with just 3.5% down, making it easier for home buyers who don’t have access to a lot of up-front capital to still qualify for a loan. Borrowers with substandard credit scores, specifically 500-579, can also qualify for a loan but with a 10% down payment, however it is likely that someone with this credit score would be turned down for a conventional loan so the FHA is a good alternative to those with a weaker credit history.
Cons
Unfortunately, there are some restrictions that come with a FHA loan. FHA loans can only be used to finance a primary residence, meaning you would not qualify for an FHA loan if you were looking to buy an investment property or a vacation home. Luckily this won’t apply to this scenario as this is predominately for your first home mortgage in DC.
Conversely, FHA loans also come with minimum property standards that the property must meet, meaning that you wouldn’t be likely to qualify for a loan if you were looking to buy a fixer upper.
Additionally, Private mortgage insurance is unavoidable on an FHA loan, a significant cost that will increase your monthly loan payment that cannot be cancelled. As noted previously, PMI can be cancelled on a conventional loan by either having a 20% down payment or building up enough equity in the home, unfortunately an FHA loan does not have this option, leaving you with monthly PMI costs for the lifetime of the loan.
Concluding
The takeaway here is that depending on your current situation, you have options when looking at your first home mortgage in DC.
Please be sure to let us know if you found this helpful or reach out for more information on securing your first loan.
