Understanding Mortgage Types in Today’s Minnesota Real Estate Marketplace
Prior to the shakeup in the real estate market nationwide, there were an almost infinite variety of mortgages available to homebuyers. Some of those “creative” mortgage types played a significant role in causing the real estate crisis that is just now beginning to correct itself. Today, fewer types of mortgages are available, and lenders are more selective in lending money to homebuyers. Fortunately, mortgage loans are being made at very attractive interest rates, often historically low, and homebuyers with stable incomes and good credit are finding mortgages more easily as the real estate market recovers. Through their own banks, savings and loan companies, and credit unions or through trusted mortgage brokers suggested by real estate brokers and agents, like those at The Minnesota Real Estate Team of REMAX Advantage Plus (Broker a Member of Regional MLS of MN), mortgage loans with very attractive terms are available to qualified borrowers. Some of the basic types of mortgage loans most often available, include:
- Conventional Loans – These mortgage loans are made solely from the private sector, and are not insured by the government in any way. They’re the traditional way homebuyers have borrowed for decades. Made by banks, savings and loan companies, credit unions, and other lenders, most conventional loans require a substantial down payment, which may be as much as 20% in some cases. They usually require a higher FICO credit score than government-backed loans, as well. Conventional loans are available at fixed interest rates over terms that range from 15 to 30 years, or at adjustable rates, which may change over time. If you have excellent credit, a substantial down payment, and a stable income, conventional loans may be a good choice for you.
- Government-Backed Loans – The Veterans Administration, the FHA, and the USDA all back loans made by private lenders. The federal government insures the loan, so lenders are generally more willing to lend money under these programs. Some of these loans have specific qualification requirements and special programs are often available.
- FHA Loans – These government-backed loans are the most popular type. The loans, themselves, are made by private, FHA-approved lenders, and are insured by the FHA. The borrower pays an insurance fee with these loans. A variety of special programs for FHA loans is often available, but those programs change from time to time. A trusted loan broker, like those recommended by the licensed agents of The Minnesota Real Estate Team can tell you about available programs, as can loan officers of FHA-approved lenders.
- VA Loans – Available only to active members of the Military services, retirees from military service, and veterans of military service, these loans are very popular, and can finance as much as 100% of the value of a home, letting those eligible for a VA loan purchase a home with no down payment. Managed by the Department of Veterans Affairs, information on VA loans is available from lenders and loan brokers, or directly from the Veterans Administration.
- USDA Loans – To qualify for one of these government-backed loans, you must meet geographical location and income restrictions. Originally designed to make loans to farmers, the program has been expanded to include other rural residents. If you qualify for one of these loans, it may be a good solution. Click here to learn more about these loans and to help determine your eligibility. Our agents can also access the actual MLS online to search for properties that may fit this type of loan.
- Fixed Rate Mortgages – Regardless of the type of loan, the actual loan you get may be a fixed rate loan. What that means is that the interest rate you pay, and your actual monthly payment do not change over the term of the loan. Fixed rate loans are available for terms ranging from 12-30 years. Interest rates may vary, but are currently at very attractive levels. For homebuyers planning to live in their new home for a long time, a fixed rate mortgage makes the most sense, since your interest rate and payment will not change. In addition, most of these mortgages allow you to pay an additional amount toward the principal of the loan at any time. Making such payments can dramatically shorten the time before the loan is paid off.
- Adjustable Interest Rate Mortgages – Usually called ARMs, these mortgages begin with a low initial interest rate over a fixed period of time. After that time, the interest rate, and the monthly payment, can change. The new interest rate will be calculated by a formula that is based on some element of the economy, often the Prime Rate, which is the rate banks pay to borrow money. While these ARMs are attractive to some homebuyers, since they start with a low payment, there is some risk involved with ARMs. If the interest rate goes up, the payment will go up, as well. As so many homeowners learned in recent years, an increase in the monthly payment may make it difficult to make the payment. If home prices go down at the same time, as they did in recent years, homeowners can find themselves underwater on their loans, owing more than the home is worth. If you plan to own a home for only a short time, and think home prices will go up, such loans may make sense, but consider the risks carefully before using an ARM to finance your home.
Minnesota Home Mortgages for Real Estate Purchases in Minneapolis St. Paul
Our licensed REMAX agents understand the current mortgage market and are always happy to discuss mortgages with their clients. In addition, we have strong relationships with trusted mortgage brokers, and will be happy to refer you to them to get the information you need. At our special seminars for first time homebuyers, we offer information on mortgages and help new homebuyers get the facts they need about home mortgages. As licensed agents, we have unlimited access to Minnesota MLS listings and can send you information about all types of property. As a full-service real estate team, we always go the extra mile to help our home buying clients with every aspect of finding and buying a home. Whether you find a home of interest using our powerful Minnesota Real Estate Listings that shows you properties listed with Participants of Northstar MLS of MN, your home search begins with us. Contact us today to get started.