Beginning mid-June 2012, certain current, FHA-backed homeowners will be able to refinance their existing FHA mortgage into a new one, without having to pay the government-backed group's new, costly mortgage insurance premium schedule.
First-time home buyers in Washington State have a lot of options when it comes to choosing a mortgage loan. And because different borrowers have different priorities, there is no single mortgage product that works best across the board.
The best strategy, for a first-time buyer, is to choose the loan that works best for your particular situation. With that in mind, let’s look at some of the mortgage options available to first-time home buyers in Washington.
The 30-Year Fixed-Rate Mortgage
The conventional 30-year fixed-rate mortgage loan is by far the most popular home loan option used by first-time buyers in Washington State. In fact, when you see news reports about “average” mortgage rates, they’re usually referring to the 30-year fixed.
Many first-time home buyers in Washington choose the 30-year fixed mortgage because it spreads the payments out over a longer term. This in turn reduces the size of the monthly payments, making them more manageable.
Additionally, the fixed interest rate will stay the same for as long as you keep the loan. This gives you the benefit of payment stability and predictability, over the long term. There typically aren’t any surprises with a fixed-rate mortgage.
One of the downsides of using this mortgage option to buy a first home is that you could end up paying a higher interest rate, compared to a shorter-term loan. But for many first-time buyers in Washington, this trade-off is more than acceptable. For these borrowers, the fixed rate and the smaller monthly payments outweigh the higher rate.
The 15 Year Fixed-Rate Mortgage
This mortgage option is similar to the one we just covered, in that it has a fixed rate of interest. The obvious difference here is that the repayment term is shorter — half the length of the more popular 30-year loan.
This shorter term results in a larger monthly payment, since you are essentially compressing the payments into a shorter period of time.
First-time home buyers in Washington who use 15-year fixed mortgages might have higher payments (compared to a 30-year loan), but they can often qualify for lower interest rates. On average, 15-year rates tend to be lower than their 30-year counterparts. And the shorter term means you’ll be paying interest for a shorter period of time.
The total amount of interest paid over time can be significantly lower with the 15-year mortgage, compared to the longer option. As you can see, there is almost always a trade-off to be made when choosing a home loan option.
FHA Loans: Popular With First-Time Buyers in Washington
The FHA-insured mortgage program is a popular financing strategy for first-time home buyers in Washington State. In fact, the majority of these loans go to first-time buyers (though the program is not limited to that audience).
There are two features of this program that first-time buyers find appealing:
- It offers a relatively low down payment. Borrowers who use an FHA loan to buy a house in Washington could put down as little as 3.5% of the purchase price or appraised value. That’s the minimum required investment for this particular program.
- FHA eligibility requirements tend to be a bit more flexible as well, when compared to conventional (non-government-insured) mortgage loans.
The downside to using an FHA loan is that most borrowers have to pay for mortgage insurance. This is an added cost that increases the size of the monthly payments. Mortgage insurance is almost always required whenever a borrower puts down less than 20%, and that applies to both FHA and conventional home loans. It’s another thing to consider as you choose a mortgage option.
FHA 203(k): Financing for Fixer-Uppers
The FHA has another unique program that is well suited to some first-time home buyers in Washington State, particularly those who want to buy a “fixer upper.”
The FHA 203(k) program allows you to purchase and improve a home with a single loan. First-time buyers who use this program can buy a house in Washington that needs repairs or improvements, and finance some of those improvements as well.
According to the Department of Housing and Urban Development:
“Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.”
Conventional Loan with a Down Payment of 20% (or More)
Not all first-time buyers in Washington can afford a big down payment. After all, you’re not earning proceeds from the sale of a previous home. But those who can afford it often choose to make a down payment of at least 20% on a conventional mortgage loan. This allows the borrower to avoid mortgage insurance.
Private mortgage insurance (or government-provided insurance, in the case of FHA loans) is generally “triggered” by a low down payment. This insurances is usually required when the loan-to-value ratio rises above 80%.
By using a conventional loan, and by making a down payment of 20% or more, first-time buyers in Washington can avoid the added cost of mortgage insurance. It’s just one more financing option to consider.