If you’ve been paying attention to the housing market recently, you will have noticed it’s on fire 🔥. And you might have wondered the advantages of having a home mortgage. Indeed, from Seattle, WA to St. Petersburg, FL, there isn’t a market that hasn’t been affected by the low mortgage rates and high Millennial demand for housing. The market hasn’t seen this much activity, ever (even more so than the housing financial crisis of 2008).
Given the recent interest in homebuying, we thought it would be prudent to discuss exactly how all these Americans can afford such large homes. Furthermore, why now — of all the years past, why are mortgages and refinances becoming popular all of a sudden? Let’s first discuss the basics of a mortgage and what are its advantages. They are equally complex and beneficial so it’s important to ensure we cover all the bases.
What is a mortgage loan?
Simply put, a mortgage loan is a loan secured by your home. It might be a house, a store, or even a piece of non-agricultural land. Banks and non-banking financial institutions both offer mortgage loans.
The lender gives you the loan’s principal and charges you interest on it. You can pay back the loan in monthly installments that are convenient for you. Your property acts as a security deposit, and it remains in the lender’s ownership until the loan is fully repaid. As a result, the lender will have a legal claim to the property for the duration of the loan, and if the buyer fails on the debt, the lender has the power to seize the property and sell it at auction.
The mechanics of the American home mortgage
The United States is unique from almost all other countries because its government has created quasi-government agencies to help subsidize the mortgage market 🇺🇸. More on this below but the TLDR is that the cost of a home is frequently far more than the amount of money saved by most families. As a consequence, the government created a way for homebuyers and their families to acquire a home with only a slight down payment, such as 20 percent, and pay the rest off over the next 30 years. In the event that the borrower fails, the loan is assured by the worth of the property.
Millennials now account for over 37% of all the homebuyers in the United States. This is great news but before we get too excited, let’s give thanks to generations past for their contributions that got us here today. These “quasi-government” organizations, as referenced above, were created decades ago to help homeowners like us secure a mortgage well beyond what we could afford. Those agencies are called Freddie Mac and Fannie Mae, and they deserve extra attention for their support of homebuyers.
Freddie Mac and Fannie Mae 👫
The United States Congress founded Fannie Mae and Freddie Mac, two government-backed mortgage firms, in 1968 and 1970, respectively. Fannie Mae and Freddie Mac are in charge of keeping the mortgage market in the United States functioning properly. Both firms acquire mortgages from a variety of lenders, ensuring that individuals, families, and investors have a consistent and stable supply of mortgage finance.
Fannie Mae and Freddie Mac loans feature minimal down payment requirements and competitive interest rates. However, the most significant advantage of Fannie and Freddie loans is that they are the mortgages that most lenders want to make.
Homeowners with Fannie Mae and Freddie Mac mortgages were given safeguards under the CARES Act. Lending providers were banned from initiating a judicial or non-judicial foreclosure against you under the CARES Act.
What are the different types of mortgage loans? What are the pros and cons of each?
No matter what anyone tells, you, always remember: A mortgage is a debt . It’s a very polarizing topic to discuss with friends because many of us were raised on the premise that debt is bad. The truth is, some debt is bad, some debt is okay, and some debt is great. Many today would argue that mortgage debt is great since the rate is so low and it affords you a bigger home. On the other hand, if you have to refinance your mortgage to pay off debt, then that would be an example of toxic debt (since it implies you may be living a lifestyle beyond what your current income can support).
Some people believe that debt should be prevented at all costs. Others view it as a means of improving one’s quality of life or as a means in hopes of increasing fortune. What’s awful about debt, factually, is reckless credit usage.
Here’s a rundown of the many types of mortgage programs, along with their benefits and drawbacks, to help you determine which is best for you.
A mortgage with a Fixed Rate
For the duration of the loan, the interest rate is fixed. These loans provide a consistent monthly payment and a low-interest rate. Borrowers who wish to pay off their mortgage quicker can typically make extra payments toward the principal, as prepayment penalties are uncommon 💰.
Pro: It is predictable because the monthly payment is fixed.
Con: Taking out a fixed-rate loan while the interest rates are high, you’re stuck with it for the duration of the loan—unless you refinance shortly and obtain a drop rate.
A mortgage with an Adjustable Rate (ARM)
After a fixed-rate cycle of months to years, the interest rate on an adjustable-rate mortgage (ARM) varies. ARMs are sometimes stated as a pair of numbers, such as 7/1 or 5/1. Usually, a 5/1 ARM has a fixed rate for five years and then adjusts every year, rounding off if that option exists.
Pro: An ARM’s opening interest rate is often lower than that of a standard fixed-rate loan, so it’s easy to get lured in by the teaser rate, but it might wind up being cost more in interest over the term of your mortgage than a fixed-rate loan. An ARM may be the ideal option for someone who plans to market their home before the rate changes.
Con: Future rate hikes might be significant—though yearly and life-of-loan changes are limited—leaving many adjustable-rate mortgage borrowers with significantly elevated monthly payments than if they had promised a fixed-rate mortgage.
Refinance loan or second mortgage
Sometimes a homeowner already has a mortgage but they want to change it up. Maybe they want a lower rate, or a longer term, or maybe they want to take out more equity from their home. Whatever the case, many options are available! The most common would be a home mortgage refinance. This is when the homeowner closes out their original mortgage in favor of another one. With interest rates so low these past couple years, this path has become much more popular. How often a homeowner refinances is usually a personal decision but they should consider at least these factors:
- market interest rate vs their current mortgage interest rate
- length/term of their loan vs the new one they want to get
- cost of loan (“closing costs”) vs keeping still
- [cash-out refinance only] what will they do with the funds?
Pros: If you can secure a lower interest rate than your current loan, and the closing costs aren’t that much, then definitely consider refinancing. Or if you need the money for home renovations, a cash-out refinance may be your best bet.
Cons: Refinancing costs money so make sure the math works in your favor.
The standards for conventional loans are generally more stringent than those for government-backed house loans. When reviewing traditional loan applications, lenders usually look at credit ratings and debt-to-income ratios.
Pro: A conventional mortgage may be used for a range of property kinds, and PMI would help borrowers qualify for a conventional loan even if they lay down less than 20%.
Con: Compared to government loans, conventional loans have tougher qualification standards and may demand a larger down payment.
You may get an interest-only mortgage from few lenders, meaning your monthly fees will cover only the interest. As a result, you must have a strategy in place to ensure that you can have enough money to return the entire sum borrowed at the final term of the period.
Interest-only loans may appear appealing since your monthly installments would be lesser than that with having a repayment mortgage, but unless you have a strong strategy to reimburse the capital, a repayment loan is the better option.
The standard age of house purchase has decreased, and an increasing number of Millennials are now purchasing their first houses. The loan duration is determined by the debt-to-income (DTI) ratio and the sum of interest paid on the loan. For homebuyers, a longer contract implies a longer time to pay off that debt.
Low-interest rates and lender banks’ digital practices in loan application procedures, as well as enticing manufacturer discounts and government incentives, are bringing about the trend 🏦.
The government does not directly grant Federal Housing Administration (FHA) loans. FHA loans can be issued on behalf of the government by certain lenders, and the FHA guarantees the loans. FHA mortgages might be a viable option for those who have a high debt-to-income ratio or a bad credit score.
Pro: FHA loans need a smaller down payment and a higher credit score. Moreover, FHA loans may enable applicants to use a non-resident co-signer to assist them to be qualified.
Con: If the down payment is less than 10%, the MIP will remain in place for the life of the loan.
FHA 203(k) Loan
An FHA 203(k) loan is a government-insured mortgage allowing funding purchasers to use one loan for both home renovation and house purchase. Current homeowners may also be eligible for an FHA 203(k) loan to help pay for the repairs of their current house.
Pro: An FHA 203(k) loan can be utilized to purchase and renovate a home that would otherwise be ineligible for a traditional FHA loan. It just takes a 3.5 percent down payment.
Con: You must be eligible for the full property value, as well as the price of anticipated improvements, with these loans. It’s possible that the rate will be greater than on a normal FHA loan. You’ll also have to pay a one-time and monthly mortgage premium insurance payment.
VA (Veterans Affairs) Loan
Home loans for representatives and veterans of the US military, as well as qualified surviving married partners, are backed by the US Department of Veteran Affairs. The majority of VA loans do not need a deposit.
Pro: You won’t have to put any money through or deal with PMI payments on a monthly basis.
Con: On purchase loans, a one-time VA “funding charge” varies from 1.4 percent to 3.6 percent.
Fannie Mae HomeStyle Loan
The Fannie Mae home-style mortgage needs just 3% – 5% down, but a credit score of 620 is an option for fixer-upper lovers.
Pro: You don’t have to pay for mortgage insurance beforehand, and you can terminate it after twelve years or when you have 20% equity on your house. The rate is frequently cheaper than an FHA 203(k) loan (k).
Con: Credit score requirements must be met.
Reverse Mortgage Loan
Homeowners aged 62 and above can use a reverse mortgage to convert some of their property value into cash. The age of the youngest homeowner, the loan rate and fees, the heir’s wishes, and payout type are all aspects to consider.
Pro: There are no monthly payments required, and the homeowner can select between a chunky amount, a monthly payout, a line of credit, or a combination of the mentioned three.
Con: The interest rate may be greater than that of a typical mortgage. Mortgage insurance, a direct charge, an initiation fee, and third party expenses are usually paid by the homeowner.
What is the primary reason a Millennial would want a mortgage?
For the immense majority of individuals, purchasing a home without a mortgage is difficult. Putting down hundreds of thousands of dollars in one lump payment is a luxury fortunate by a select few 💸.
Millennials are starting to take notice of the important of a mortgage. They’re realizing that financing a home purchase enables them to choose where to live, what to do with their income, and how to invest their extra cash. But before determining whether or not to take out a mortgage, a Millennial should consider the following five factors.
Clearing and paying off student loans and other debt
What is the most difficult aspect of buying a home for Millennials? Student loans are a form of debt. A nationwide student loan debt is being paid off by almost 44 million Americans.
Millennials are often regarded as the most well-educated generation. They have some of the greatest levels of debt in history, with school loans and large credit card loads. During the Great Recession, many Millennials graduated and entered the labor market.
They must be free of debt before purchasing a home because it is the most costly purchase they will be making.
Putting money aside for the down payment
The majority of us do not purchase our first house with cash. In reality, Millennials buy with a mortgage in 97 percent of cases. That’s why a large down payment is critical—not only to decrease your interest rate but to help in paying off your mortgage faster. It is suggested that you put down 10 to 20 percent.
Making a Difference in Competitive Market
They go on to the next phase, which is to enter the property market after paying off school loans and saving for a down payment.
Because Gen Xers prefer to buy existing houses rather than starting homes, you’ll be up against other Millennials and older people.
Buyers that participate in bidding battles have a larger budget and greater home-buying expertise. These tips will help the process to stay in the game:
- Before you make an offer, be preapproved for house financing. A preapproved loan indicates that your lender has reviewed your financial situation and determined that you can afford the down payment and monthly mortgage payments.
- Second, take decisive action. They go to great lengths to keep the process going forward. If you can have a home inspection done in days, it’s preferable not to keep an interested seller waiting for weeks.
- Finally, establish a relationship with the vendor. Most homeowners get emotional when selling their house, so you never know how far a personal letter may go.
In a Seller’s Market, Finding an Affordable Home might be Difficult.
Another issue that Millennials face is the growing cost of housing. Rising housing costs can be particularly aggravating for people who have just paid off college loans and secured solid employment.
On the brighter side, mortgage rates are quite cheap. The regular interest rate on a 15year fixed-rate mortgage fell to 2.15 percent in August, the lowest it’s ever been.
Not succumbing to the need to stretch your budget and purchase a property that is out of your price range is important. No home is worth putting other financial ambitions on hold for.
As a result, they are more likely to opt for a 15 year fixed-rate standard mortgage, which is the lowest and the only one that is generally recommended for them.
Getting Used to the Purchasing Process
As a first-time homebuyer, acquainting oneself with the buying procedure is one of the smarter things you can do. The more you know, the better you will be as a homeowner. There is no greater feeling than making that first mortgage payment and all your hard work today will pay off for tomorrow.
That’s why working with professionals who know what they’re doing is especially crucial for Millennials. Looking for a real estate agent with a lot of expertise and who understands the market well enough to locate a great bargain on the perfect home?
We are working with a real estate agent who has the heart to advise and gives time to pay attention to wants and answer any queries.
When it comes to picking a mortgage company, what do Millennials generally look for?
This segment, on the other hand, has benefited from technological advancements. They also have a simple time comprehending and using modern advancements. Aside from reasonable rates, these are some of the most important characteristics this demographic looks for in a mortgage company:
- Morals and Principals — Millennials, for starters, have a conscience. The Oklahoma City explosion, the 9/11 act of violence, long and damaging wars, and financial instability shaped their early years, instilling in them a desire to work with companies that are committed to the greater good. They go out of their way to find mortgage businesses that give back in both major and little ways.
- A powerful online and social media existence — The generation of Millennials are the first digital natives, and even the oldest are more comfortable with computers and cell phones than previous generations. Millennials will create judgments on which mortgage firm is worthy through a variety of websites and social media sources. It plays a major role in their decision-making.
- Constructive peer thoughts and reviews — What their friends and family think is important. Millennials have perfected the knack of collecting info and developing opinions from peers and acquaintances. Positive testimonials and social recommendations of mortgage firms have a significant impact on consumers’ purchasing decisions.
- Brand credibility — Millennials have an incredible capacity to sniff a parasite in the blink of an eye. They must believe in your brand before they can believe in your mortgage firm. They will not be buy-in if they don’t trust your brand.
- Engagement — This demographic looks for mortgage firms that are willing to interact with them. Only when they feel at ease and trust your mortgage company, then they will be willing to enter into a commercial partnership with you.
- Calculators — The majority of Millennials will be cautious to call your bank for information. Consider creating calculators so that the ordinary individual can easily understand how much a mortgage would cost, what their rates will be, and how much they can manage to pay.
Is it possible for Anyone to Get a Mortgage?
Property loans are only given to those who have enough assets and income in relation to their obligations to effectively carry the value of their home over time.
Mortgages aid in the development of credit. It enables homeowners to invest, save and spend their income on items other than their mortgage. Your lifestyle may not be rewarding if you keep all of your money in your house.