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By Michael Corbett | Real Estate Pro in Los Angeles, CA

The Best Mortgages for Today’s New Market

Today Trulia launched the Trulia Mortgage Center, available online and on dedicated iPhone and iPad apps, to help prospective homebuyers and current homeowners get personalized, real-time mortgage rate quotes. In honor of our newest offering, I wanted to talk about the best mortgages for today's market. 

The Traditional 30- or 15-Year Fixed Mortgage
I always recommend that you get a 15- or 30-year fixed mortgage—even if you are planning to stay in your new home for only a short while. You never know what may happen in your life, and you want to know that you have a safe and consistent mortgage payment every month for the life of the loan.

Once again, I am dating myself, but I am willing to suffer the label of old age if it saves you from financial ruin ten years from now. Interest rates do not always hover around 5 and 6 percent. Oh, no. It may seem unbelievable to you today, but I remember buying a property and being thrilled that I was able to lock in a fixed rate at only 12.5 percent! That’s right, within the past few decades, interest rates have actually gone to over 14 percent. And that could easily happen again.

I want you to have the confidence that the mortgage payment amount you have today will be the mortgage payment amount you’ll be paying ten or fifteen years from now, no matter what the market or the economy is doing.

The Next Best Mortgages for Today’s New Market

The Adjustable Rate Mortgage (ARM)
There are many variations of an adjustable rate mortgage, or ARM. But the common denominator is that the interest rate and payment can change over the term of the loan. It can start low, which helps you qualify when rates are high, and then it adjusts in one, three, five, or seven years. But as we’ve already seen, you cannot predict how high the adjustment will go—potentially pushing you further and further away from what’s affordable. Which is why these loans are not ideal.

The interest rate on an ARM is linked to an economic index. Common indexes used by lenders include the activity of one, three, and five-year Treasury securities, but there are many others. Each ARM is linked to a specific index, which dictates changes in your rate—periodically adjusting up or down as the relevant index changes. A standard ARM will adjust and rise or fall monthly depending upon the current market rates. You may see an ARM described with figures such as 1-2, 1-1, 3-1, and 5-1. These are fixed-rate adjustable mortgages. The first figure in each set refers to the initial period of the loan, during which your interest rate will stay the same as it was on the day you signed your loan papers. The second number is the adjustment period, showing how often adjustments can be made to the rate after the initial period has ended. Thus, if you have a 5-1 loan, your payment will be the same or fixed for the first five years, but after that, it will readjust every year to the current market rate, for the life of the loan.

FHA Loans
FHA loans are backed by the Federal Housing Administration and don’t require large down payments, which is why they gained popularity in recent years. I don’t suggest anyone apply for a loan with less than 20 percent down. The fact that these loans will qualify buyers with only 3.5 percent down payments really scares me. And it should scare you, too. If you can only scrape together 3.5 percent for a down payment, then I say you can’t afford and should not buy a house just yet.

That said, I feel I have to at least discuss and explain FHA-backed mortgages because they currently comprise 33 to 36 percent of the market. And many mortgage brokers and banks do offer them. You’ll simply need to go to an FHA-approved lender. Contrary to what you might think, the FHA does not actually make loans or guarantee loans; it insures loans. The insurance removes or minimizes the risk lenders face when buyers put down less than 20 percent. That is why lenders are willing to accept less than 20 percent down from the homebuyers on these loans. Other facts about these loans that you should consider if you want to apply for one:
  • You’ll need a credit score of at least 640. The interest rate you will be offered will reflect your credit score. The lower your credit score, the higher your interest rate and vice versa.
  • You’ll only need to put down at least 3.5 percent, and hopefully you can come up with a lot more . . . please.
  • FHA loans allow for higher debt-to-income levels than lenders conventionally allow. Meaning your income does not need to be as high as it would have to be on a non-FHA loan.
  • You’ll additionally pay mortgage insurance each month, which is at least 0.9 percent of the loan.
  • You’ll need to stay within certain limits with regard to purchase price. FHA-backed loans will only cover up to a certain amount based on location. The current FHA limit has been raised in some counties; in Los Angeles County, for example, the FHA limit is $729,500 (in 2010). However, in Denver, Colorado, it’s only $406,250.

Now that we've discussed the best (and next best) mortgages for today's market, hop over to Trulia's Mortgage Center and check it out. 

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