Mortgage 101

When it comes to buying a home in Brooklyn, it’s easy to get caught in the headlights of that down payment—and with good reason! 20% down in New York City can (and does) often run into the six digits. But what you may not know is that you actually have a surprising number of options available to you. 

Below, we’ll go over some of your mortgage options as of 2020:

Fixed vs. Adjustable Rate

One of your first buying decisions is whether you want a fixed-rate or an adjustable-rate mortgage loan. All loans are either one of those two options, or a combination “hybrid.”

  • Fixed-rate | Your rate will stay the same for the life of your repayment term. Because of this, your monthly payment will also stay the same, regardless of how long the term is. 
  • Adjustable-rate mortgage loans (ARMs) | These loans have an interest rate that will change (adjust) over time. Typically, an ARM loan will remain fixed for a year before any adjustments. Therefore, it’s considered a “hybrid” product. For instance, a 5/1 ARM loan carries a fixed interest rate the first five years. After that, it begins to adjust every one year.

Pros and cons: adjustable versus fixed-rate mortgages

Both types of mortgages have pros and cons associated with them. The ARM starts  with a lower rate than the fixed type of loan, but it has the uncertainty of adjustments later on. With an adjustable mortgage product, the rate and monthly payments can rise over time. The primary benefit of a fixed loan is that the rate and monthly payments never change. But you pay for that stability through higher interest charges, compared to the initial rate of an ARM.

Government-Insured vs. Conventional Loans

After deciding on Fixed vs. ARM, next, you’ll decide on a government-insured home loan (FHA, USDA, VA), or a conventional type of loan. 

A conventional home loan is not insured or guaranteed by the federal government in any way. 

Government-insured home loans include:

FHA Loans

The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses if a borrower defaults.  

Pro: This program allows you to make a down payment as low as 3.5% of the purchase price. 

Con: You’ll have to pay for PMI, which can mean a higher monthly payment

VA Loans

The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. 

Pro: The biggest advantage of this option is that borrowers can receive 100% financing for the purchase of a home. That means no down payment at all.

Con: Only military service members (current and retired) and family members are eligible. You’ll have to meet certain requirements.

USDA / RHS Loans

The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to “rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.” Income must be no higher than 115% of the adjusted area median income [AMI]. The AMI varies by county. 

Pro: Option for lower-income borrowers to build home equity.

Con: Obviously only applicable to rural areas.

 Jumbo vs. Conforming Loan

Depending on the amount you want to borrow, you might fall into either the jumbo or conforming category. 

  • A conforming loan | This meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. Fannie and Freddie are the two government-controlled corporations that buy loans from the lenders who generate them, and then sell them to investors. A conforming loan falls within their maximum size limits, and otherwise “conforms” to pre-established criteria.
  • A jumbo loan, on the other hand, exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared 
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