JD’s Millennial Minute: Mortgages for Millennials

by Jonathan DeesingMay 24, 2016

Navigating the Mortgage Landscape

young couple packing boxes
One of the most daunting prospects for first-time homebuyers is the mortgage. Likely the biggest loan you’ve ever taken out, the concept of borrowing hundreds of thousands of dollars can be jarring. It doesn’t help that mortgages can be structured in various ways, have different term lengths, and include numerous additional fees and taxes.

Luckily, mortgages are relatively easy to digest, especially once you’ve narrowed down the type of mortgage you want. And for millennials, the best mortgage options are narrow and typically geared toward first-time buyers.

Mortgage Basics

By undertaking a mortgage you’re using a lender’s money to purchase a home while agreeing to repay the cost of the home along with interest. You’re using your home as collateral and in the case you fail to repay the loan, the lender can take back, or foreclose on your property.

Mortgage payments are comprised of principal and interest – principal is the amount you borrowed and interest is what the lender charges for loaning you the money. While you must pay back the principal amount, interest is charged only as long as you still owe money on the loan. You can quickly calculate your principal by subtracting your down payment from the cost of the home.

Length of Term

The two most common mortgage term lengths are 15 and 30 years. Mortgages paid over 15 years will naturally require less interest overall and boast lower interest rates, but they also demand higher monthly payments. Some borrowers treat their home as their chief investment and approach this higher payment as forced savings that reliably appreciate.

Despite the increased interest amount, the vast majority of homebuyers opt for 30-year mortgages. These mortgages offer lower monthly payments and savvy homeowners can pay more than their monthly payment to cut down on how much they need to pay back in interest. This strategy is wonderful because borrowers can always resume paying the minimum if times get tough – in theory, you could pay back a 30-year loan in 15, but it doesn’t work the other way around. For millennials just starting out, the lower payment and increased flexibility of the 30-year loan are generally the best option.

Types of Rates

When you secure your first mortgage, it will come with an interest rate, representing the cost of the money you borrowed. There are two main approaches to this rate:

An adjustable-rate mortgage (ARM) fluctuates with housing market conditions.

A fixed-rate mortgage (FRM) remains the same regardless of market conditions.

An FRM is the safer choice for first-time homebuyers. It insulates you from fluctuating markets and if interest rates drop considerably, you can always restructure your loan to reflect those lower rates, which is called refinancing.

If you know the market well and feel confident that interest rates will drop after you secure your mortgage, an ARM can mean reduced mortgage payments. However, this goes both ways and you could easily find yourself with a higher monthly payment if interest rates go up.

Federal Housing Administration Loans

Signing Mortgage

As many millennial homebuyers are saddled with student debt, a Federal Housing Administration (FHA) loan may be their best option. These loans can be either fixed-rate or adjustable and are great for buyers with bad credit scores (must still be above 500) or limited cash on hand. FHA loans require a relatively small down payment (3.5% of the home price) and closing fees can be rolled into the total loan amount. Because these loans are so risky, they also require mortgage insurance, which varies by state and is generally paid monthly along with the mortgage.

In an FHA loan, the government is essentially guaranteeing the loan, so you need to abide by FHA rules. This means the property must be appraised and approved by an FHA official, which can limit your home options. You also need to use an FHA-approved lender. Regardless, FHA loans are an excellent option for many millennials in a less than ideal financial situation.

First Time Incentives

Young Couple Buys House
An FHA loan can be a great choice, but if you don’t fit the requirements or are looking at homes that aren’t FHA-approved, there are still a number of great options for first-time homebuyers.

Military service members can apply for VA loan, in which the government guarantees part of the loan, allowing for better loan terms. USDA loans are available in most rural areas and, despite the name, you don’t need to buy a farm to qualify. Many states also offer grants or tax breaks for first-time buyers, so make sure to check to see if this is something available in your state.

If you fit in with the typical millennial home buyer, you’ve likely already determined which type of mortgage is best for you – a 30-year, fixed-rate mortgage. But this is by no means a one-size-fits-all loan, so make sure to find a lender you trust, ask lots of questions, and do your research before signing anything. And trust me, you’ll need time for research – there are a lot of things to sign.

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About The Author
Jonathan Deesing
Jonathan Deesing is a home improvement and real estate writer who has written for Auction.com, Modernize, and Apartment Guide. When he's not fixing up his duplex he splits time between running and beekeeping.