Choosing the right mortgage is an important part of the homebuying process, and you want to be prepared. We previously wrote about the 4 major types of mortgages, but what other options are available these days? To help Capital Region homebuyers make an informed decision, we spoke with Drew Aiello from the Fairway Independent Mortgage Corporation, who highlighted some lesser-known mortgages, key terms, and more.

outside of a large house with two garage doors

What’s the difference between an adjustable-rate mortgage and a fixed-rate mortgage?

When you hear the term adjustable-rate mortgage, it refers to a type of loan that starts with a fixed interest rate for a period of 1, 3, 5, 7, or 10 years. At the end of the fixed period, your interest rate can adjust up or down based on current indexes. Adjustable-rate mortgages are typically 30-year loans.

A fixed-rate mortgage is a type of loan that features the same interest rate from beginning to end, which is commonly between 10 to 30 years. In recent years, Aiello notes that adjustable-rate mortgages have not been as popular because clients can get a fixed-rate that’s not much higher than the adjustable-rate.

What is a 2-1 buydown loan, and what are its pros and cons?

According to Aiello, the 2-1 buydown loan is a great way to take advantage of lower rates as a homebuyer. Essentially, you’ll be able to temporarily get an interest rate that’s lower than current market rates for your first two years of home ownership. Here’s how it works:

  1. If rates are at 5% today, the rate in year one would be 3%. In year two, it would be 4%, and then it would go back to 5% for the remainder of the term.
  2. The seller would put the interest difference between 5% and 3%, and 5% and 4%, in a separate side account to make the bank whole on their interest.
  3. This usually costs the seller about 2% of the purchase price as a seller concession.

The 2-1 buydown loan is a fixed-rate program, and the only negative is that the seller has to contribute the interest expense to make this work, but it’s only about 2% typically.

How do lock-in rates work for someone buying a new construction home?

A mortgage broker can lock in rates for up to 12 months for someone building a new construction home. Aiello recommends that clients lock in their mortgage rate “once the home’s foundation is in or the building permits have been issued to ensure the lock is long enough for the construction to be completed.”

When should a buyer consider a bridge loan?

A bridge loan is a special type of short-term loan that can be used by homeowners who need immediate cash flow. If you’re looking to purchase a new home while waiting to sell your current residence, a bridge loan allows you to access some of your home’s equity. Bridge loans can be as short as 6 months or up to 1-3 years, and you can expect higher interest rates.

What are home equity loans?

Also known as HELOCs, home equity loans are typically second mortgages on a person’s home, and they are an excellent way to access equity in a home and use it as collateral. This type of loan can help when you need small dollar amounts for debt consolidation or home improvements.

In many cases, homeowners will be able to borrow up to 80% to 90% of their home’s appraised value. There are usually no closing costs, but you will have to prepare for the monthly payments.

outside of a house with a grassy lawn and one large garage door

What are jumbo loans, and when should a buyer consider one?

In today’s market, a jumbo loan is any loan amount that is greater than $647,000, and rates on most jumbo loans have been lower or the same as conventional loans, which is a rarity. They are useful if you’re planning to buy a larger, more expensive home, and have the income to qualify for the loan.

What about no-closing-cost mortgages? How do those work?

Closing costs include a variety of fees and taxes that a homebuyer typically pays upfront, such as appraisal fees, the home inspection fee, property taxes, and more. With a no-closing-cost mortgage, your lender will pay for your closing costs, and then you’ll receive either a higher interest rate on the loan or have the costs rolled into the mortgage itself.

This means you’ll be paying more over time. However, if you expect mortgage rates to go down soon, or don’t plan to own your home for a long period of time, then a no-closing-cost mortgage can be helpful.

Are there any other lesser-known mortgages that buyers should know about in the current real estate market?

One mortgage option that self-employed borrowers should know about is a bank state program. Aiello explains that for this home loan, “banks will qualify you based on your last 12 months of bank statement deposits instead of tax returns.” Why is this important? Large tax deductions can make it harder for lenders to see your true income and qualify you for certain loans. A bank state program lets you use your personal or business bank statements, which can help prove your ability to repay a loan.

Are you ready to enter the real estate market and purchase your dream home? Contact our team today – we’re ready to assist you with all your needs.

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