Home Buying Guide: Massachusetts
From fixed to Jumbo to ARM loans, FHA, USDA and VA loans, and reverse mortgages, the mortgage options available to potential borrowers in Massachusetts are seemingly endless. But, don’t let the number and types of mortgage options intimidate or confuse you. This primer will hopefully assist you in understanding most mortgage loans and programs.
Fixed Rate Mortgages
Fixed rate mortgages do what the name suggests, the rate stays fixed at a certain percentage for the life of the loan. The 30-year mortgage loan is the typical term, although lenders may allow 15- or 20-year terms. Rates will vary according to current market rates, but will remain fixed for the life of the loan. Fixed rate mortgages are typically used by home buyers seeking to stay in a home for an extended period of time. These types of mortgages are usually the best choice for someone not planning to move within a five-year horizon and are ideal when mortgage rates are low. Fixed rate mortgages in Massachusetts also allow for refinancing at a later date in most cases which may be a good option if rates drop from the rate which the loan was fixed at.
The Reverse Mortgage in Massachusetts
Let’s get this one out of the way early as the reverse mortgage applies to a specific subset of homeowners, namely, homeowners who are at least 62 years of age or older. The reverse mortgage allows a homeowner to borrow money against existing equity in the home. For example, if your home is valued at $500,000 and you own it free and clear, you may qualify for a reverse mortgage of $350,000 based on the equity that you currently have in that home. You will not receive the full value of the equity in your home, the value received will be a calculation based on lender policy and industry standards.
Generally, homeowners who find themselves interested in a reverse mortgage are requesting a reverse mortgage to gain some income to pay the existing mortgage and then use whatever is remaining for living expenses. Keep in mind, however, that the amount of money that you qualify for in a reverse mortgage is not directly proportionate to the amount of equity that you have on the property. The mortgage lender will provide what is known as an initial principal limit which will be an amount that is significantly less than the market value of the home. Additionally, a reverse mortgage borrower will be able to receive an initial amount under the reverse mortgage during the first year of the loan but that that initial amount cannot be greater than 60% of the total loan value.
While the reverse mortgage may be a viable option for a homeowner in a specific set of circumstances, a reverse mortgage is not for everyone and certainly not the only borrowing option available.
VA Loans
Veteran’s administration or VA loans are loans available to veterans and military home buyers. There are many benefits to VA loans for those who qualify. One benefit is that the homeowner need put nothing down, 0% instead of the typical 20% required down payment needed to obtain a conventional home loan. Also, the VA loan has no requirement of PMI or private mortgage insurance. PMI is required for home loan borrowers needing to finance more than 80% of the value of the home, but not required for those qualifying for a VA loan. While interest rates can vary, VA loans typically offer interest rates that are competitive with those of conventional mortgage loan rates.
VA loans are further subdivided into the VA purchase loan, VA IRRRL loans, VA Cash-Out Refinance loans, and the VA Energy Efficient Mortgage. It is the VA purchase loan that will allow a veteran or current service member to purchase a home with 0% down if the borrower meets all necessary mortgage requirements.
Jumbo Loans
These loans are for home buyers who need to borrow over the current $688,850 borrowing limit in Massachusetts for a single-family home. Banks and other lenders do not always offer jumbo loans because the lender in a jumbo loan takes on significant risk since these loans cannot be sold to Fannie Mae or Freddie Mac. However, in a stable housing market banks and other lenders will typically offer jumbo loans to those who qualify.
Because of the risk shouldered by the lender in a jumbo loan it is not unusual for these loans to have both higher interest rates and require a higher down payment as compared to a traditional conventional loan. Jumbo loans will typically carry a down payment of over 20%, usually in the 20-25% range.
Qualifying for a jumbo loan usually requires not only a credit score of 700 or higher but also requires the borrower to have a low DTI (debt to income ratio). The income used to determine DTI is based on your pre-tax income. Lenders are looking to ensure that you have enough capital to cover principal, interest, taxes and home owner’s insurance premiums should something happen to your present income. If you could cover these costs with a reserve of about 6 to 9 months’ worth of cash you would likely meet this criteria.
Federal Housing Administration Loan (FHA)
First time home buyers who are unable to provide a full down payment and who have less than stellar credit may qualify for an FHA loan. FHA loans typically have low interest rates, though conventional loans offer better rates as a rule, so if you can afford a higher down payment this loan may not be for you.
The United States Department of Agriculture Loan (USDA)
If you live in the following areas in Massachusetts you may be eligible for a USDA loan: Georgetown, Rowley, Ipswich, Essex, Hamilton, Newbury, Rockport, Groton, Pepperell, Dunstable, Stow, Sudbury, Southborough, Millis, Norfolk, Wrentham, and man points west and north of Worcester (excluding Springfield and its immediate surrounds).
USDA Loans are available for low to moderate income households seeking to buy a home in a rural community, where rural is defined by the USDA. These loans typically have no down payment requirement, do not require the purchase of monthly mortgage insurance, and may even allow for monies allocated in the loan to cover repairs of the property. Additionally, there are minimum income requirements that you will need to achieve in order to qualify for this type of loan.
Adjustable-Rate Mortgages (ARM)
There are nearly as many types of ARM mortgages as there are fish in the sea. But at the core an ARM mortgage is one in which the rate is variable. How and when the rate varies are the matters which each type of ARM loan will differ on.
There are ARM’s in which the interest rate is fixed for a one-year period, after which the interest rate adjusts annually in accord with the treasury average index added to the loan margin; this is the 1-year Treasury ARM. There is another type of ARM in which the interest rate adjusts according to a pre-fixed schedule after a period of the rate being fixed. Yet another ARM is the flexible payment option ARM in which the monthly loan payments vary. ARM loans are usually marketed to people whose income is variable, or seasonal. The interest only ARM allow borrowers to pay only the interest for a set time period. Once the interest only period lapses the borrower is required to make payments then on principal. Lastly, there is the convertible ARM which allows you to choose the variable rate but convert to a fixed rate once a period of time has elapsed.
As previously stated, the number and types of ARM loans and the details which make each loan different are many. It is best to consult with an expert in these areas, or do your own research into which loan may be best for your circumstances. If you are risk averse or know for sure that you will be in your new home for over five years an ARM loan is not usually an ideal choice. However, there may be times when such a loan is preferable, for example, when you won’t live in the home very long and you can sleep at night with the idea that interest rates may climb. Each one of us is different, and the ARM is an option that might appeal to some. Having reviewed the many mortgage types available, you are well on your way to the next step – Step 4 and Step 5: Making an Offer and Applying for a Mortgage.
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