When making housing-related decisions, a household needs to weigh the pros and cons of owning and renting. There are many factors a family should consider before finalizing the decision, such as financial status and future housing plans. However, only a small number of people can purchase a home on their own. Majority of home buyers in the United States have to rely on mortgage companies for financial help.
Buying vs. Renting
Gauging whether buying or renting is better for a family starts with taking into consideration the following factors:
- Flexibility – For consumers who need more flexibility, renting is almost always the better choice. It provides them with a greater level of mobility, since they can move out after the agreed-upon term. For families that have no plans of moving in the near future, buying makes more sense.
- Financial Standing – Renting is ideal for those who have tight finances, as it comes associated with fewer and lower initial costs. On the other hand, buying expands one’s investment portfolio, although it does have higher upfront payments.
- Equity – Home ownership is one of the best types of investments, especially since it builds equity. Equity “accumulates” when the value of a home goes up while the outstanding mortgage balance shrinks.
Mortgage Rate Movements
In world of housing loans, mortgage rates move based on several primary factors: U. S. stocks, foreign markets, employment rates and inflation.
For interest rates to fall, stocks should follow suit and so does inflation. Foreign markets also have to perform better and employment rate should increase. When the opposite of these things happen, consumers can expect a guaranteed increase on mortgage rates.
Fixed-Rate Mortgages Overview
One of the most common types of home loans, a fixed-rate mortgage comes with the assurance of fixed monthly payments. Its interest rate won’t go up, but it won’t go down either. Lenders generally offer these in either a 15-year or a 30-year term.
Adjustable-Rate Mortgage Basics
The biggest advantage that adjustable-rate mortgages have is their lower initial rates. For a specified period of time, the monthly payments of borrowers don’t change. After this though, rates may go up or down depending on market volatility and fluctuations.
FHA Loan 101
Another popular type of mortgage, FHA loans have less rigorous requirements. They also have down-payment requirements lower than those of fixed-rate or adjustable-rate loans. The Federal Housing Administration insures these mortgages. However, lenders offering these loans require borrowers to obtain mortgage insurance, which serves as their protection against potential loan defaults.
Impact of Credit Score on Mortgage Rates
Borrowers who have good credit scores usually enjoy lower interest rates on their home loans than those with low scores. Mortgage applicants with a score of 740 or better can expect the best rates from lending companies. On the other hand, consumers with a score of less than 620 will find it difficult, although still possible, to qualify for a loan.
Down Payment Requirements
The down payment refers to the money a home buyer gives to the seller to secure a purchase. The remaining payments comes from the mortgage. Expressed in percentage form, most types of home loans require at least a 20% down payment. It’s still possible to qualify for a mortgage if the buyer doesn’t meet this, although this might likely mean purchasing mortgage insurance.
For instance, to purchase a house that costs $200,000 and avoid insurance at the same time, one has to put down at least a $40,000 down payment and take out a $160,000 loan. The exact down payment needed still depends on the terms of the seller, although in most cases, buyers usually opt to put down the entire 20% so they don’t have to worry about mortgage insurance.
Congressional Research Service: https://fas.org/sgp/crs/misc/R42995.pdf
S. Department of Housing and Urban Development: https://portal.hud.gov/hudportal/HUD?src=/buying/loans
Consumer Financial Protection Bureau: https://www.consumerfinance.gov/askcfpb/100/what-is-the-difference-between-a-fixed-rate-and-adjustable-rate-mortgage-arm-loan.html