Homebuyers have been on a wild rollercoaster ride over the last four years with major historical shifts in the market. Rising inflation, increased interest rates, skyrocketing home prices—all of these fluctuations have made it difficult to plan for financing a home purchase. But folks looking to purchase a home in New Jersey in 2024 have many options. If one method of financing does not work for your circumstances, it may be time to try another method. Here are seven different kinds of mortgages to consider in 2024:
1. Conventional Mortgage
A conventional mortgage loan is when a homebuyer finances the purchase of a property through a private lender like banks and credit unions or mortgage companies. These loans are not offered by or secured by a government entity, but Frannie Mae or Freddie Mac can sometimes guarantee these loans. Interest rates for conventional loans are, on average, higher than government-backed mortgage loans. However, with a good credit score, an applicant can still lock in a lower-than-average rate with a conventional mortgage.
Those with a fair or better credit score, acceptable debt-to-income (DTI) ratio, and the money for at least a 20% downpayment will be more likely to get approval for a conventional mortgage. If you cannot provide 20% as a downpayment, the mortgage company can still approve your loan but may require you to acquire private mortgage insurance until you have accumulated at least 20% equity in the property.
2. Fixed-Rate Mortgage (FRM)
Fixed-rate mortgages (FRM) are the most common loan option available to homebuyers today. Available in a 15-year or 30-year term, an FRM has a static interest rate that will not change over the life of the loan unless you refinance or modify your terms. FRMs are commonly sought after because of the stability they provide. No matter what is going on economically, those with an FRM can rest assured their interest rate will not fluctuate. Stable rates mean predictable payments that make it easy to plan for. It is also easier to compare FRM loans since the payments are easy to determine and will not change.
The most significant disadvantage of a FRM loan is that you cannot take advantage of falling interest rates if they occur. If you get your loan while interest rates are high, your interest rate will remain fixed even if the average interest rates begin to drop. However, the stability FRMs offer makes this loan option an excellent choice for those who intend to stay in their home for a long time.
3. Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages (ARM) are the opposite of FRMs. With an ARM, your interest rate will fluctuate based on the rise and fall of average interest rates. This fluctuation can make it difficult to predict your mortgage payments in the future. Most ARM loan terms will establish a predetermined time at which your interest rate will be re-evaluated and changed if necessary, typically once a year. You will always get advanced notice that your rate is changing.
The terms of the ARM loan will indicate what caps are on your interest rate changes, whether yearly, over the life of the loan, or the total in dollars you will be expected to pay back. ARMs often come with a low introductory interest rate, meaning more affordable payments initially. For this reason, ARMs are often an excellent choice for homebuyers who intend to stay in a home for a short time or refinance before the introductory rate period has ended. It is generally easier to get an ARM than an FRM with a lower credit score or higher DTI ratio.
4. Interest-Only Mortgage
This is a type of loan in which the borrower only pays the interest—the actual cost of borrowing the money—during the first few years of the loan. After the interest-only period, the borrower must refinance, pay off the loan, or make monthly principal and interest payments. These payments will be much higher than if you had been paying the principal and the interest from the start of the loan. You also will not grow any equity in your home during the first few years of payments.
To qualify for this loan will require higher down payments, excellent credit scores, and low DTI ratios. Most lenders will only approve this kind of loan for an applicant with a high monthly cash flow, a rising income, and proof of considerable cash savings. Interest-only mortgages are ideal for property investors or those who do not intend to own the property long-term.
5. Jumbo Mortgage
A jumbo mortgage loan is called for when financing for a property exceeds the limits set by the Federal Housing Finance Agency (FHFA). The FHFA limit in New Jersey varies by county. A jumbo loan is a common choice for those purchasing a home of half a million dollars or more. The downpayment for a jumbo loan has fallen to 10-15% in recent years, but the requirements to qualify for a jumbo loan are stringent. Jumbo loan interest rates used to be higher than conventional mortgages, but the gap has closed in recent years. Now, you can get a jumbo loan for less than the average rate.
You will need to prove you have cash on hand to cover payments for the first year of the mortgage and prove you meet specific income requirements by providing W-2s going back two years. You will also need an exceptional credit score, 700 or above, with a very low DTI ratio. Those who make $250,000 to $500,000 a year are the likely candidates for a jumbo loan. But just because you qualify for a loan of this size does not necessarily mean you should take it. There is a lot of risk associated with jumbo loans because they cannot be guaranteed by the government and due to the high value of the loan.
6. Balloon Mortgage
This loan begins with a period of no or low payments. Balloon mortgages will be structured differently depending on the terms of your specific loan, with some requiring no payments until the final due date and others requiring some monthly payments before the final due date. The benefits of a balloon mortgage are low payments for borrowers who do not plan to stay in a home for a long time or who plan to refinance shortly.
However, there are significant drawbacks to a balloon mortgage. If you are not making payments, or even if you are making interest-only payments, you will not be building equity in your home. It can also be complicated to change the terms of a balloon mortgage or refinance it later. If you cannot get the funds to pay off the lump sum payment at the end, you are financially at risk.
Many who opt for a balloon mortgage plan on selling the home to accumulate the cash needed to pay off the lump sum. But if you cannot sell your property or sell for a high enough price to cover the loan, you could default on your loan.
7. Government-Insured Mortgage
These loans are just what they sound like: loans that the government insures. The US government does not directly provide the loan, but they agree to insure the loan. This allows borrowers who otherwise would not be able to secure a loan the opportunity to finance the purchase of a property. Because the government has agreed to cover the loan if the borrower defaults, mortgage companies are likelier to approve a candidate that is otherwise not ideal. Government-insured mortgages tend to offer lower down payments, lower interest rates, and less stringent financial requirements.
There are, however, particular requirements that must be met to qualify for a government-insured mortgage. For example, one of the most common government loans, an FHA loan, is typically reserved for first-time homeowners with low credit scores or a difficult/limited credit history.
Veitengruber Law is a full-service real estate law firm with years of experience navigating NJ real estate and contract law. We can help NJ homeowner hopefuls reach their real estate goals in 2024.
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