Your Guide to Mortgage Options

Apr 4, 2024 | Additional Insights, Planning Playbook

Whether you’re a first-time homebuyer, buying a second home, or looking to refinance, understanding the nuances of mortgages is crucial for making informed financial decisions. Learn about traditional and non-traditional mortgage options. If you know someone who might be buying a home and could benefit from this video, please share it with them.

Hi, I’m Sam Schutte, Vice President and Wealth Advisor with GreenUp Wealth Management. Most people borrow money when they purchase a home. My wife and I bought our first house in 2005 with a 30-year fixed rate mortgage paying 6.25 percent. Then, as interest rates decreased, we took the opportunity to refinance and lower our monthly payment.

Now, interest rates are back up again and it’s a great time to review the different ways you can borrow money to purchase a home. Mortgages are comprised of principal, that’s the amount you borrowed, and your interest rate. There are several types of mortgages and different ways to pay back that principal and interest.

Which is right for you? Well, the most popular are fixed-rate mortgages. It’s called a fixed rate because the interest rate remains constant for the entire term of the loan. The benefit of a fixed-rate mortgage is a predictable monthly payment that remains the same for the life of the loan. This is a great fit if you plan on staying in that home for a long period of time.

Typically fixed rate mortgages come as 15 year or 30 year. Let’s look at an example. Let’s say you were buying a house for $750,000 and made a 20 percent down payment. That’s $150,000 that you put down on the house, and you’ll get a mortgage for the remaining 80%, which is $600,000. If you went with a 15-year loan and rates were at 7 percent, you’ll pay $5,392.97 every month.

With fixed-rate mortgages, you have the same monthly payment. But it is amortized over time, meaning there is a gradual reduction in the amount that you owe. At the beginning, most of your payment is going toward interest, and toward the end of the loan, most of your payment is going toward the principal.

Let’s take a look at the difference between a 15-year and 30-year fixed-rate mortgage. With a 30-year fixed rate mortgage, borrowing $600,000 at 7 percent, you would have a monthly payment of $3,991.81. This is significantly lower than the $5,392.97. Why would anyone choose a 15-year mortgage? Well, the payments are higher because you’re paying over a shorter period of time. This means you’re paying less interest in the long run. The total interest paid on a 15-year mortgage is much less than that paid on a 30-year mortgage because with a 30-year mortgage, you’re paying over a lot longer period of time. Also, interest rates for 15-year mortgages are typically a lot lower than that of a 30-year mortgage, so the difference in total interest paid is even more significant.

Now, let’s look at other types of mortgages. The Adjustable Rate Mortgage, or ARM, allows you to have a lower interest rate at the beginning of the loan. With adjustable rate mortgages, the interest rate is initially lower than fixed-rate mortgages. The initial fixed period is five or seven years. After that, the rate will adjust annually. Therefore, your monthly payments may increase or decrease with changes in interest rates.

What if you only had enough money to pay the interest on your mortgage? Well, there’s a loan for that. It’s called an interest-only mortgage. Borrowers only pay the interest on the loan for a specified period of time. After that interest-only period, payments increase to cover both principal and interest.

Another low-payment option is a balloon mortgage. With a balloon mortgage, you have a low monthly payment for a fixed period of time, usually five to seven years. At the end of that term, the remaining balance is due in a lump sum. Usually, borrowers either refinance or sell the property before the balloon payment is due.

Adjustable rate mortgages, interest only, and balloon mortgages will all have a lower monthly payment than fixed-rate mortgages. These may be a good option if you think you won’t be in that home for a long time, maybe your income will increase in the future, or you expect interest rates to fall. These types of mortgages can be risky. Your payment is likely to increase significantly after the initial period, and the big question is, will you be able to afford it in the future?

Finally, let’s look at special loans for those who qualify. FHA loans by the Federal Housing Administration are designed to help low to moderate income borrowers and typically require a lower down payment but may have higher mortgage insurance premiums.

VA loans by the Department of Veterans Affairs are available to eligible veterans, active-duty service members, and surviving spouses. They offer favorable terms including no down payment requirement and are guaranteed by the VA, thus reducing the risk to lenders.

USDA loans by the United States Department of Agriculture are designed for rural and suburban home buyers who meet certain income criteria. They offer low to no down payment options, and they are backed by the USDA, encouraging lenders to provide mortgages in eligible areas.

Before choosing a mortgage, carefully consider your financial situation, risk tolerance, and future plans. Consult with a mortgage professional or your GreenUp Wealth Advisor for personalized guidance. If you know someone who might be buying a home and could benefit from this video, please share it with them. I’m Sam Schutte. Thanks for watching.

Author

  • Sam Schuette

    Vice President | Wealth Advisor | Minneapolis - St. Paul -- Sam Schuette has two decades of experience helping clients plan to reach their financial goals. Sam’s passion for relationship building stems from his drive to be his clients’ partner in discovering financial success every day and through life’s milestones. He combines experience, research techniques and strategic advice to meet the challenges of today and find solutions for tomorrow.

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