When it comes to buying a home in Atlanta (or anywhere for that matter), it’s important to know what your financing options are for a mortgage. A home purchase is a major commitment over many years, and depending on the type of loan, you may need to be prepared for a changing interest rate.
Fixed Rate Mortgage
The most popular type of mortgage is a fixed-rate home loan. For the term of the loan (e.g.,10, 15, 20 or 30 years — but usually 30), the interest rate stays the same. (Interest is the amount you pay the bank for loaning you the money.) The shorter the term [length] of the loan, the less interest you’ll pay to the bank. But a longer term, such as 30 years, will give you a lower payment per month.
For example, a 30-year fixed rate home loan at an interest rate of 4.5% would run a homeowner $1,773.40 per month. $638,424 is what you’d actually pay the bank over those 360 months. If you opted for a shorter mortgage (say, 15 years) with the same interest rate of 4.5%, your monthly payment would be $2,677.48 per month… $481,946.40 paid back over the course of the loan.
To test some different scenarios with fixed rate home loan costs, check out the mortgage calculator on Bankrate.com.
Adjustable Rate Mortgage
Adjustable Rate Mortgages (or ARMs) are just that… home loans with interest rates that adjust over the duration of the loan. Unfortunately, a homeowner cannot predict how the interest level will change.
Some ARM loans are a combo of adjustable and fixed rate mortgages. How often the rate changes depends on the loan, too; some loans will change rate percentage once a year, others every three years. You may start your ARM with an interest rate of 3.5%, then it could go up to 7% a few years later.
FHA loans are “insured” by the Federal Housing Association (hence the acronym FHA).
Borrowers with FHA loans pay for mortgage insurance, which protects the lender from taking a fall if the borrower is not able to pay back what’s owed. With this mortgage insurance, lenders are able to offer FHA loans at attractive interest rates and with more flexible qualification requirements. FHA loans are available in fixed and ARM options, and there is also a special FHA loan option for purchasing a condo.
While flexible, the requirements for FHA loans won’t work for everyone in every situation.
- There are maximum FHA loan amounts outlined for different parts of the company. In Dekalb and Fulton counties, the maximums (as of December 2014) are: single family – $320,850 duplex – $410,750, triplex – $496,500 and fourplex – $617,000.
- While it’s lower than for traditional loans, there is still a downpayment required. According to FHA.gov, “Your down payment can be as low as 3.5% of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.”
- Read more guidelines and stipulations about FHA loans on FHA.com.
Loans for Renovations
Home-equity loans. This is creating a home mortgage used for renovating an existing property you’re purchasing. You get the upside tax-wise of conventional mortgages, minus the closing costs. Home purchasers receive the entire loan up front and pay it off over 15 to 30 years. The interest rate is most often fixed (versus adjustable). Downsides: Interest rates are usually higher for these loans than traditional loans, the bank usually approves your contractor and purchases and keeps close tabs on all phases of your project — and since the real estate bubble a few years ago — it’s become harder to get a bank to approve this type of loan.
Home-equity lines of credit (HELOCs). Like the name suggests, this type of loan gives you access to funds if you have strong equity in your home. The best analogy is that these home loans are like like credit cards: the bank approves you for up to a certain amount, and you only have to pay interest on the amount that you use. The funds are available for the homeowner to access them as needed across time. Unlike with the home equity loan, rates for these loans are adjustable (usually aligned with the prime rate). Be leary of lenders who may give a great initial rate, then increase it sharply very soon into the borrowing process.
New Construction Loans
Construction loans are among the most complex of loans to secure, however it could payoff because it’s also very exciting to design every aspect of your new home. Prior to the housing bubble a few years ago, it wasn’t uncommon for a construction loan to be secured by the home builder or the to-be homeowner. Nowadays it’s rarer that a builder can get such a loan, and honestly challenging for even the homeowner to secure the loan since there’s no collateral to come back and repossess if something goes awry (read: they are risky gamble for banks!). The builder and will-be homeowner must be impeccably detailed with the project timeline, architectural plans, budget, etc. in order to secure the loan.
Construction loans are really only for the period of building the home and shortly thereafter (from there, you’ll close on a more traditional loan). Rates can vary. The homeowner should expect very regular check-ins from someone with the bank as the home is being built until the loan is transitioned to a permanent one.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is sometimes also called Lenders Mortgage Insurance ILMI). This is not a loan, but it’s important to mention for the purposes of planning for your loan. It’s the insurance payable to a lender (your bank) for securities that may be required when you finance the purchase of your home. The insurance protects the lender in case the home buyer cannot repay the loan, and for some reason the bank is not able to recover all the costs of the home (i.e., the bank tries to foreclose the property, but the earnings of that sale and the administrative fees don’t total what the loan was taken out for.)
Will you have to pay PMI when you take out your next home loan, and how much? According to Zillow, “if your down payment is less than 20 percent of the value of the home, lenders will require you to carry mortgage insurance.” Also from Zillow: “Conventional Mortgage insurance rates vary — usually, the lower your down payment and/or the lower your credit score, the higher the premiums — but typically the premiums can range from $30-70 per month for every $100,000 borrowed.”
(Fine print: the mortgage examples don’t include residential property taxes.)
Carter & Associates would be thrilled to partner with you on purchasing your next home in the greater Atlanta area, and can answer any questions you have about loan types and the pros and cons of each arrangement.
We recommend Donna Casteel of HomeServices Lending.
Donna R. Casteel, Home Mortgage Consultant
HomeServices Lending, LLC | 1531 Piedmont Rd NE | Atlanta, GA 30324
Phone (404)897-9968 | Cell (770)633-5155 | Fax (866) 608-2369
Carter & Associates specializes in residential real estate buying and selling in the metro Atlanta area. They also have a custom new home building program. Reach out for more information today!
About Carter & Associates
We are the #1 performance team in units and volume at the number one brokerage firm (in units and volume) — Harry Norman Realtors, Atlanta, Ga. With Carter & Associates you will have not just an agent, but an entire TEAM of Career Professional Realtors focused on your Real Estate transaction – whether it’s building, buying or selling. Our success is a result of a team built from the best in the business!
(Article published January 2015