buying a home is the quintessential American dream and there are many financing options to consider when doing so. Your mortgage needs will change as you enter different phases in life and there are many products suited to these stages.
Your First Home
With historically low interest rates, young professionals are well-positioned to purchase their first home. Borrowing guidelines have tightened up so there are some hurdles to overcome. Generally speaking, younger borrowers will have a good credit score, but have what is considered “thin credit”, meaning they may not have enough accounts and the successful payment history that underwriters require. Having at least one (two is better) open credit cards and an auto loan will bolster a first time borrower’s credit worthiness.
Another hurdle young professionals may face is the down payment. If a buyer is unable to come up with a 20% down payment, then the loan must include private mortgage insurance (PMI) before closing. If this is a burden, the solution to the problem could be a “gift” from parents or grandparents. Underwriters will require documentation and explanation of any large deposits and gifts over a certain amount may trigger an IRS “gift tax”, so it’s best to consult current tax code first.
A conventional mortgage with a 5% down payment or a mortgage insured by a government agency are appropriate and popular choices with borrowers at this stage in life.
Middle Age Homeowners
At this stage, there are quite a few more mortgage products available to established home owners. Those middle age homeowners who are underwater may consider refinancing under a program like HARP 2.0, which has no cap on loan-to-value ratio. The HARP refinancing program has been successful in lowering payments for borrowers who bought in 2006, 2007 and 2008. If a borrower has equity in the home they may consider a two-loan package with a home-equity line of credit that can be used for renovations or other purchases like automobiles. Another option some middle-age borrowers find attractive is the adjustable rate mortgage. ARMs can be risky, but borrower’s at this age usually have the experience to decide if an ARM is a smart option for them. If you plan on selling your home before the rate resets then an ARM could be the way to go.
Interest rates are historically low and no one knows this better than borrowers at or nearing retirement. For these homeowners, refinancing the remainder of their balance into a very low interest rate 15-year mortgage and placing the savings realized into a retirement is a popular strategy. Using retirement income, be it social security or a pension, to downsize into a home with less maintenance is also a priority for seniors planning for the future. Some retirement age borrowers who own their homes outright or have substantial equity may opt for a mortgage or refinance that generates cash they can gift to a child or grandchild to use as a down payment for their first home.