THINGS TO KNOW ABOUT
CONVENTIONAL PURCHASE & REFINANCE LOANS
Conventional Mortgages are the Most Common Type of Home Loan in Wisconsin
because these home loans conform to a specific set of guidelines. The guidelines are set by two government-sponsored enterprises, Fannie Mae and Freddie Mac.
Wisconsin conventional mortgages continue to be the most common type of home loan. A mortgage broker can do the shopping around for you for the best interest rate and overall loan cost. To learn more, call (608) 216-7058 or simply fill out a no-obligation Online Application today!
WILLIAM SEVERSON, CONVENTIONAL MORTGAGE SPECIALIST
IS A CONVENTIONAL MORTGAGE RIGHT FOR YOU?
There are several different options when it comes to looking for a mortgage. Conventional mortgages are one type of mortgage; but you also have adjustable rate (ARM), 15 year, 20 year, 30 year options to consider as well. Once you’ve narrowed that down, you still need to consider if you want to try to put at least 20% down to avoid private mortgage insurance (PMI). Lastly, you’ll want to know where you can get the best interest rate or the best APR.
That is a lot to consider. Whether you’re a first time home buyer or a seasoned home buying veteran, there is a lot of information to weigh out. Although the conventional loan is more popular, it may be more confusing to navigate through all of the choices. It can really help to have a licensed mortgage advisor help you to understand and weed through all those options.
Lets Take a Closer Look at Some of the Options and Terminology
Conventional guidelines are the rules in place to determine whether you qualify for a loan backed by Fannie Mae or Freddie Mac. Some common guidelines for Wisconsin are:
- Loan amount – cannot exceed $424,100
- Credit score – generally 620 is the minimum allowed and better scores lead to better interest rates
- Down payment amount – minimum of 5%, a 20% down payment relieves borrower from paying PMI
- Debt ratio – monthly mortgage cost (principal/interest/tax escrow/insurance) cannot exceed 28% of your gross monthly income and your total monthly debt (mortgage cost plus monthly payments for auto, credit card, student loans, child support, etc.) cannot exceed 36% of your gross monthly income
Fixed rate versus ARM is always a big decision to make. A fixed rate is just that, the interest does not change over the life of the loan. The only way to change the interest rate if you have a fixed rate is to refinance your Wisconsin mortgage. An adjustable rate mortgage stays at the same interest rate for a period of time and after that set amount of time (generally 1,3, 5, 7, or 10 years at the most) the interest rate will change. Many people like ARM home loans because the initial interest rate is lower than a fixed rate, but there is definite risk associated. The market can be unpredictable and rates may increase annually after the fixed period. Generally interest rate caps prevent a jump of more than 2% each year, but going from an interest rate of 4% one year to 6% the next year and 8% the year after that can be a scary thought. The ARM can be a good option for borrowers who plan to relocate before the fixed period ends. If being risky and gambling aren’t your style, the fixed rate is going to be a better alternative. A little higher interest rate is worth the security of knowing your interest rate can’t escalate.
Mortgage term simply refers to the scheduled amount of time you have to pay off the home loan. 30 year fixed rate is the most common Wisconsin conventional mortgage, but there are also 20 year, 15 year, even 10 or less. Your loan is amortized over the term of the loan. This allows lenders to determine how much you will need to pay each month in order to have the full amount paid off by the end of the term. In Wisconsin there is no prepayment penalty on mortgages, so you could always pay off your mortgage before you get to the end of your term. Again, interest rates vary depending on the length of the term. The shorter the term, the lower the interest rate.
Private mortgage insurance (PMI) is insurance for the lender. You pay the insurance company and the insurance company may end up paying the back if you default on the loan and the property is foreclosed on. PMI does not protect the borrower against damage or loss of property, home owners insurance does that. Most lenders require borrowers to obtain PMI if the put anything less than 20% down on the property.
Getting the best interest rate or APR can be tricky. First, it’s important to understand the difference between interest rate and APR. The interest rate is the amount of interest you pay in order to obtain the loan. The APR or annual percentage rate adds the additional costs (closing costs, origination fees, discount points, etc.) to the interest rate to give you a better idea of how much it will cost to borrow money for your new home. The APR helps determine which lender is offering a better overall deal rather than just a better interest rate. You also can’t believe the rates advertised will be the rate you will actually qualify for. Advertised rates are generally based off best case scenarios including perfect credit, low debt ratio and other factors.
With all of the above mentioned variables, it can be very difficult to know what options are best for you. It’s crucial to ask questions, understand all the facts and compare lenders. This is where an experienced Wisconsin mortgage professional can be very valuable. Letting someone else do the shopping and number crunching can save you a lot of time and headache, but more importantly, it can save you a lot of money.