How Do Mortgage Products Differ?
Here are some of the key factors that make up a mortgage.
So, you're interested in a home loan? Millions of Americans embark on the process of getting a mortgage each year, and for many it can be a long and confusing trek. However, it doesn't need to be. A lot of the hassle stems from finding the best mortgage type for your borrower needs and wants, and all at the best rate.
There are a number of variables that go into creating a mortgage, and home loans vary greatly in their structure. The variety in offerings is one barrier to a simple mortgage process. Consumers who do their research, however, can streamline the decision-making by picking out the characteristics and qualities of the loan they want.
In reality, there are a lot of factors that go into a mortgage — and even more tied to qualifying for one, like credit score and property type. But, there is often an ideal mortgage type for each borrower. Here are the variables to be aware of when you're shopping for a mortgage:
One of the primary considerations any mortgage borrower has is the interest rate attached to the loan. When it comes to the different mortgage products, there's much diversity to interest rates, which can benefit homeowners. For instance, two common loan options are the fixed-rate mortgage and the adjustable- rate mortgage (ARM). In the former, the interest rate is fixed across the life of the loan, which makes for easy budgeting. ARMs, on the other hand, stay fixed for an introductory period, then readjust periodically. A 5/1 ARM, for instance, would stay locked for five years and rebalance every year after over the life of the loan.
Length of loan lifetime is another adjustable aspect of a mortgage. Most fixed-rate mortgages come with longer terms, like 30 years or 15 years. ARMs tend to come with short-term timeframes, as they're often paid off quicker. Loans like a 3/1 or 7/1 ARM aren't uncommon. Some hybrids take the best of both worlds. The 10/10 hybrid, for example, is fixed for the first 10 years, readjusts the rate to the prevailing market, and stays fixed another 10 years.
In general, the industry standard for a down payment is 20 percent. A down payment of that amount is favored by lenders because it demonstrate a borrower has liquidity and financial stability, which reduces their risk. A bigger down payment also keeps loan-to-value ratio low, another lender gauge of risk. However, 20 percent is not a blanket requirement. There is some room for negotiation between buyers, lenders and home sellers, as well as down payment assistance for some.
When borrowers work with a lender like Vectra Bank, they not only have access to the mortgage products designed by the bank itself, but also mortgages supported by the government. These government-backed loans — issued through approved lenders — often come with more favorable terms for borrowers who qualify. FHA loans have less strict credit standards and can come with down payment requirements as low as 3.5 percent. VA loans that are available to retired and current military members and certain widowed spouses can facilitate homeownership with no down payment needed at all.
A mortgage's cost does not end at the value of the loan or the down payment. There are other loan conditions to be aware of that may impact total mortgage cost. Closing costs, for instance, are an unwelcome surprise at the final stage of the mortgage process for many. Prepayment penalties may also cause pain for unsuspecting borrowers. Talk with a loan officer to get a feel for any applicable costs and conditions.
Vectra Bank has extensive mortgage offerings to meet borrower needs, including fixed-rate and variable-rate options, as well as commercial-backed loans and government-insured mortgages. Talk to your local Vectra Bank representative today to learn more.