Episode 103: Buying a House? Here’s 5 Types of Mortgages To Know About

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[0:27] Are you ready to buy a house? June is National Homeownership month and to celebrate, I've teamed up with Citizens for a two-part homeownership series where I'll share parts of my homeownership story and we'll dive deeper into the most common types of mortgages.

[0:45] As a disclaimer – this episode is part of a paid partnership between Citizens and The Thought Card Podcast. Any views expressed are not necessarily those of Citizens and any other products mentioned are not endorsed or sponsored by Citizens. Mortgages are offered and originated by Citizens Bank NA NMLSID #433960. All accounts, loans and services are subject to individual approval. Equal housing lender.

[1:20] Now in 2017 after house hunting for a few weeks, I found a property that I fell in love with. While the home was in distress, it had everything I was looking for: spacious rooms, an open floor concept and a decent sized backyard. It was the home that I could imagine growing into and raising a family one day. I put an offer on the house and so my journey to becoming a homeowner began. Since then, I've completely remodeled my home and I've paid off over $40,000 of my mortgage.

[2:00] Although becoming a homeowner was one of the best financial decisions I made in my 20s. If I'm being honest, the home buying process left me with a few gray hairs. There was a lot of paperwork involved, a lot of moving pieces and at times I felt unsure of next steps and you know, sometimes I questioned myself. I questioned if I was making the right decision. Decision fatigue is a real thing for homeowners. It's a real thing.

[2:30] Well, when you get a mortgage with Citizens Bank, you'll have access to a professional loan officer who is responsive and knowledgeable to guide you every step of the way, a streamlined online application process and competitive mortgage rates. Citizens also has a 4.96 rating on Zillow and over 2,000 reviews that you can look through. For more information check out the Citizens Ready to Buy a Home Hub which includes helpful articles and an easy to follow application guide to help you understand the ins and outs of the home buying process. You can find the link in the show notes.

[3:00] As a first time home buyer, the type of mortgage you get can have a long term effect on your finances. Purchasing a home is one of the largest financial decisions you will make. So, the more you prepare, the more well off you will be. Since there are a lot of different types of mortgages that suit different borrowers, today, we're going to cover the most common including fixed rate mortgages, adjustable mortgages, FHA mortgages, conventional mortgages and jumbo mortgages.

[3:45] Alright, so let's go ahead and start with the first one, fixed rate mortgages.
Fixed rate mortgages is the most common type of mortgage. With the fixed rate mortgage, the interest rate does not change throughout the life of the loan. This makes it easier for you to budget every month because your total mortgage payment, which includes your mortgage and your interest, stays the same. That means that you're also protected from mortgage rates rising over time. And fixed rate mortgages are typically offered in 10, 15 and 30 year increments.

[4:18] So next we have the adjustable rate mortgage. As the name suggests, the interest rate may change. It may either rise or lower as time goes on. With an adjustable rate mortgage initially the rate is set below market value, but then it increases over time adjusting to current market rates. Here's some pros – with an adjustable rate mortgage a benefit is that it's usually cheaper than a fixed rate mortgage for the first 3 to 10 years. So this is a good option for folks who are looking to sell quickly or refinance their mortgage in the near term. However, as a con it's harder to budget with this type of mortgage because your monthly payment changes. It's also more complicated than a fixed rate mortgage. So, if you are considering an adjustable rate mortgage, ask yourself can you still afford to make these mortgage payments if the interest rate increases. So, overall all mortgages fall into one of these categories either a fixed rate or adjustable rate mortgage. And this is really focusing on the interest rate if it's going to stay the same over your loan term or if it's going to change over time.

[5:40] Okay, next we're gonna talk about the FHA mortgage. The FHA mortgage is insured by the government, the Federal Housing Administration and it's only available for primary residences, meaning no investment properties, no second homes, no vacation homes. This has to be for your primary residence where you're going to live; primarily. FHA mortgages are usually for folks who have a lower credit score and you could qualify for an FHA mortgage for a credit score as low as 580. In addition to having a lower credit score, you also have a lower down payment requirement. So the FHAmortgage, you're required to put at least 3.5% down payment and this is lower than the conventional mortgages which will cover very soon. If your credit score falls between 500-579, you'll have to make a 10% down payment. If your credit score is at least 580 and up, you can make a 3.5% down payment. This type of mortgage is actually the most affordable option for first time homebuyers. Now, with all those benefits, here's a con – with an FHA mortgage, you have to purchase private mortgage insurance, a.k.a PMI which stays with you for the life of your loan unless you make a 10% down payment in which the PMI would be on the loan for 11 years. So just be mindful that there is an additional charge that's private mortgage insurance that you have to cover because your down payment is lower with this mortgage.

So I want you to keep in mind that credit score requirements may vary by lender and your credit score may need to be higher than the FHA credit score guidelines. Many lenders impose their own rules on top of the FHA guidelines to protect themselves from costly foreclosures.

[7:40] So as a first time home buyer, this is the type of mortgage that I actually got into. This was very attractive to me because my down payment primarily did not have to be 20% like the conventional mortgages, I could put down 3.5%. So that was a lot more affordable for me. However, I am very mindful now that the private mortgage insurance that I have, it doesn't fall off. It can't fall off because of the smaller down payment that I put on. So it is a charge that I see every single month. Again, it's something to consider if you are considering an FHA mortgage. Outside of that, the only way to get rid of your PMI is to refinance into a conventional loan. Again, be mindful that there are lots of benefits to this mortgage type, but there are some cons just be prepared for those cons.

[8:34] Alright, so conventional mortgages. These are mortgages not insured by the government, but they're available through private lenders. With a conventional mortgage you can use this mortgage for your primary residence, investment properties, second homes, vacation homes. So the range is a lot wider here. However, your minimum credit score has to be 620 and up and there's no PMI with a 20% down payment. There is a PMI if you put anything below 20%, so that again is important to know.

[9:07] Similarly the PMI falls off once you've reached that 20% equity or you paid off 20% on the house. So overall the conventional mortgage has more stringent requirements. You have to have a higher credit score. However, you get to open up your selection to a lot more different types of properties. You have your investment properties, your second homes or vacation homes. So there is a benefit to this.

[9:33] Now lastly we have the jumbo mortgage. If you want to purchase a house that costs half a million dollars or more, you're probably going to go with the jumbo mortgage. The jumbo mortgage is for financing that exceeds limits set by the FHA, the Federal Housing Agency; jumbo mortgages vary by state and county. And this year's limit for example was set to $647,200 for most of the country. So that means if you're looking at a property that costs more than $647,000 most likely you're going to be looking for a jumbo mortgage. So here's what the jumbo mortgage typically requires. It requires an excellent credit score of 700 and up, a low debt to income ratio, 10- 15% down payment. And typically these mortgages are for high earners. These loans can be used for your primary residence, your second homes, investment properties, vacation homes, etc.

Keep in mind credit score limits may vary by lender.

[10:41] So whether you're just starting out looking to purchase a home soon or you're wanting to learn more about mortgages and home ownership in general. I hope you enjoyed this episode.

[10:51] For me, my biggest takeaway when I was hunting for my first home is that I didn't understand mortgages; how they worked and I didn't understand the pros and cons of each one. I was simply just, I applied and they were offered me one type of mortgage which was the FHA mortgage and I was just too happy to have a mortgage and be accepted. But if I did a little bit of more research I really feel like I could have qualified for a conventional mortgage and a conventional mortgage would have been a lot more in my favor because I actually did have the 20% down and my credit score was higher than what FHA loans required. But I didn't know. So, I went with the FHA mortgage and as a result I have a PMI charge that I cannot get rid of unless I refinance my mortgage.

[11:50] So, overall it's really important for us to understand how mortgages work and see which ones we qualify for and their pros and cons. Each one of these mortgages has pros, it has requirements and it has cons and making sure we understand how these mortgages impact our finances in the long run because most mortgages are 15 and 30 years. So our decision that we make when we're signing the contract and signing the mortgage can have really long-term effects. So just again, I hope that this episode is helpful to help you with doing a little bit more research and understanding these types of mortgages outside of your primary residence, even if you're ready for investment properties down the line, these are all important things to know.

[12:39] Also be sure to check out today’s sponsor Citizens Ready To Buy a Home Hub – their glossary for common mortgage terms will make sure you know what closing costs and pre-approval means. Get answers to frequently asked questions like – how much do I need to put down on a house or how much home can I afford. You can bust mortgage myths with their entertaining videos and ultimately feel confident in knowing what you need to become a homeowner.

So join me next time for part two of this homeownership series where I'll share practical tips for managing your money as a homeowner. See you next time.

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