Pearly’s New Pad – Picking The Loan

Is an Adjustable Rate Mortgage the right loan for me?

So glad to see all of you back because I could really use a break right now.  Apparently I’m not good at human acronyms. (And, modesty aside, we know that I’m quite good at most things.)   We went through the decisions on types of mortgages this week; it’s a good thing that our loan officer Christy was there or Mallory might well have decided on entirely the wrong kind of mortgage altogether!  At least, she might have once we had figured out all of the types of loans there are.  I’ll be eternally grateful that Christy had reasons for helping Mallory put each type on the “possible” or “not for us” list. As far as initially understanding what we were looking at, I really spent the week feeling like a fish out of water.

Really humans, it’s so much simpler in my world; find a quiet backwater with enough aquatic plants and swim right in.  As long as there aren’t too many Kingfishers or Heron around you’re set.  But, back to your world and your acronyms.

I thought Mallory was slowly losing her mind when she began to talk about ARMs.  I mean really, we’re buying a house not parts of a human!  (Turns out that they’re an Adjustable Rate Mortgage,  the interest rate on the loan can change.)  Then we had a few bad moments with Fannie Mae and Freddie Mac; I was really puzzled why total strangers would have guidelines we needed to follow to qualify for a mortgage; that’s a fine kettle of fish! Turns out they’re not other humans at all but the common names for the Federal National Mortgage Association (Fannie) and Federal Home Loan Mortgage Corporation (Freddie) which own or guarantee trillions in the US mortgage market. All of those are GSEs (Government Sponsored Enterprises, got that one) are overseen by the FHFA.  Then there’s Ginnie Mae, a government organization that supports FHA (Federal Housing Authority), VA (Department of Veterans Affairs) and USDA (United States Department of Agriculture) loans. (No one could explain to me how Mortgage Association ends up as MAE or Mortgage Corporation ends up as MAC; eventually I gave up trying to understand the human logic on those.) SMH, but again, I digress.

Is an Adjustable Rate Mortgage the right loan for me?

What those acronyms boil down for the consumer is a set of qualifications which determine if you are asking for a mortgage that’s a “conforming loan” (Music industry human and goldfish, conforming isn’t our thing. Apparently in this case we did conform which turns out to be as good in the mortgage world as it’s bad in the music world.)  The criteria for conforming (sounds really strange, doesn’t it?) are the size of the mortgage you need, the type of property you’re buying, and your back-end debt ratio among other things. Do yourself a favor and let your loan officer help you figure that one out.

Even so, we were faced with choices, so many, many choices. This many choices is not good for my human, she obsesses.

Turns out ARMs are more than body parts - they're mortgages too Click To Tweet

Luckily it turns out that one of the important factors in deciding which kind of mortgage to choose is how long you are planning to live in the residence.  Glad that Christy got that through Mallory’s head, saved me swimming in a lot of circles. (Remember that?  If I swim in circles long enough she’ll just agree with me?  Makes her too dizzy.)  Even with the help we were in deep water for a while.

Mallory, being in the music industry, which can be diplomatically called chaotic, liked the idea of a fixed rate mortgage.  After all, that meant that the interest rate wouldn’t change over the entire life of the loan whether it be 10, 15 or 30 years. Guess it seemed more stable to her.  But, I had a feeling that wasn’t going to be her best bet (and seriously, my life span is 30 years, I didn’t really want a mortgage to outlive me!)  And, not that I’m cheap, after all those doubloons that I have tucked away will keep us for a while if there is a problem, but the interest rate is higher on the fixed rate mortgage.   Over time that can add up.   We couldn’t get a VA loan (Adam isn’t in on buying the house.) didn’t want to go the FHA route with the additional requirement of mortgage insurance, and we aren’t looking at rural property so a USDA / RHS didn’t apply. We were either going to do a Fixed Rate, an ARM (couldn’t we call it something else?) or a hybrid that combined a Fixed Rate and ARM.  Then Christy asked the right question. “How long are you planning on living in the house?”  Well we really are looking at it as a starter house and after about 5 years plan to move on to bigger and better. (I’ve kept the property with the Solarium and indoor pond in the file.)  And that gave us all the direction.  Because a hybrid Adjustable Rate Mortgage can have a fixed rate for the first few years, and since the interest is cheaper initially than a Fixed Rate, looked like we were going to be swimming in that direction!    Pearly

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30 thoughts on “Pearly’s New Pad – Picking The Loan”

  1. Thank goodness for Pearly helping to guide us through the muddy waters of human acronyms. Turns out ARMs are more than body parts – they’re mortgages too, – love that. Pearly has such a delightful way of making sense of the financial aspects of buying a house, and you, Christy, have a wonderful imagination. Thank you for another fun and informative Pearly piece.

  2. I’ve never read such a fun article about types of home loans! 🙂 You’ve covered quite a lot here but in an understandable way. I’m still lamenting our type of loan, so bravo to you for educating people before they sign on the dotted line!

  3. Christy,
    I understand the loan process but their are so much that I had to get “advice” on and this article helps to educate others about the process which is difficult to understand at times. Your article are very savy and I love the way you write .

    Lori English

  4. I’m curious if all these safe guards that the U.S. mortgage market has in place are in jeopardy now that a free market economy is the mandate of many in your current government. We have much tighter mortgage and banking laws in Canada, which I believe is a good thing!

    Personally, for as long as I’ve owned a home, I have bet on a variable rate mortgage. And I’ve always come out ahead. No matter how long I’ve lived in my house. I’ve been in my current house since 1982 and every five years renegotiate the interest rate. I’ve done well and usually pay well below prime. It’s fun to have an objective perspective in Pearly, as hopefully people understand the rules and regulations seeing them through Pearly’s eyes. Thanks for the adventure, Christy!

    1. Variable rate loans can be excellent mortgage options for many people. It’s important to know your options and evaluate those against your goals and your risk tolerance. Many people don’t know that the 5 year option you have exists, they think only a one year adjustable option is all that is available. There are so many good choices, one to fit practically every situation. As of the date of this comment, we don’t know exactly what changes will be enacted by the new administration in regards to mortgage regulations.

  5. Ahhhhh yes… we had a similar loan switching situation… we moved from Virginia to Texas and after renting for a year, went to buy and was planning to VA (not Virginia lol) loan it.. however, Josh works a lot of overtime and required 24 months, and well, the prior employer, NAVY SHIPYARD (clearly not getting that in a huge Navy area, people are transient) would NOT release his OT records unless in person… really? We are going to fly back to VA from Tx to get this loan so I had to be consider (as I have no debt) and well we aren’t married, so that wouldn’t happen with the VA.. so have to switch to a more traditional loan. Then, a year later, he ended up refi with VA loan, took me off and done. But let me say, had I not had Anna, my Christy in Texas, I seriously would have hurt someone. lol

  6. So thankful for Pearly! Navigating the complicated world of home ownership and purchase cannot be done along. I love her insights on us poor humans 🙂

  7. I’ve never delved this deep into home mortgage loans, except to ask my daughter her opinion (Realtor). We went with a straight 30 yr. at an incredible rate so no need for variable. Fun facts!

  8. You have given so much clarity about the various types of loans available for home buyers in your area. It is entirely different from us here in Sweden and Central Europe in general. Always good to learn and get more inside as to how it is done in various places.

    1. Apolline, I love learning about how mortgage lending works in other countries. I think it is fascinating to see how finances evolved in different places. There are so many nuances around the world. Christy

  9. Loan stuff can be so complicated. I’m so glad Pearly makes it easy. We bought our first house on an FHA loan, but then as soon as we could, we switched it to a more traditional vehicle. We’ve refinanced a few times, and seen our loan sold off to a lot of different lenders since then. It’s a lot to remember -keeping up with who is who and what is what. Thanks Pearly!

    1. Jennifer, FHA loans are a tremendous vehicle for financing. Many people use them, but, yes, many people often find that they refinance into another loan type if they stay for a long period of time since the FHA Mortgage Insurance Premium stays on for the life of the loan whereas Conventional Private Mortgage Insurance can be removed thus lowering your payments. The servicing of your loan can be sold (this is where you make your payments). It is often sold more than once if you keep your loan for a few years. It can be a bit to keep up with, but know that both your current loan servicer and your new loan servicer will send you notices about where to make your payments and during the transition both lenders must accept your payments during the transition period. Christy

  10. What an imaginative way to make a dry, boring topic more interesting! I sometimes think I stay in my current house because I don’t want to go through all of those things again.

    1. Rachel you would not be the first to say that. There are many considerations to purchasing a new home; financing is one of them. For me, it is the thought of cleaning out my attic. I will face it one day. Christy

  11. What great information because there are certainly more options than I thought. It always pays to have the advice of a professional because they can ask the questions you never thought to ask. How lucky to be able to make a decision based on your intentions – starter or forever. Looks like you’ve been kept from being a fish out of water.

  12. We live such fast lives. If we are not brief in our communication, people become bored and ignore us.

    Seriously, whenever I talk too slowly, people will actually lose interest in what I’m saying. Part of that is getting words out as fast as possible, like saying three letters instead of three words.

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