A-Z of High Ratio Mortgage Explained by Dallas Mortgages Firm

Buying a home in a state like Dallas comes with many costs. These include mortgage payments, insurance, taxes, and down payments. Speaking of mortgages, you get to choose between two options – high and low ratio mortgages. 

Each Dallas mortgage firm has its own set of rules and limitations regarding each option. However, there are a few points most mortgage companies in Dallas agree to. 

In this article, we have decided to talk about high-ratio mortgages, their characteristics, pros, and cons, as well as a few alternatives to help you pick the right mortgage option for yourself. 

What is a Down Payment?

You must be wondering why we have started talking about the down payments, although we promised to cover high-ratio mortgages in today’s article. This is because the entire concept of high/low ratio mortgages revolves around down payments. And we think it is essential to have some basic idea of what down payments are before we proceed to cover our actual topic in detail.

A down payment is a lump sum of money a buyer has to put down in the initial phases of their home-buying journey. You can either use some portion of money from selling your existing house or use your personal savings or inheritance money to cover up the down payment cost. 

Once your lender receives the down payment from your end, they will exclude this amount from the final price of your purchase. The leftover amount needs to be paid in monthly/weekly installments. 

The down payment is an unavoidable (read: the biggest) upfront cost you should consider even before you start hunting for a new house in Dallas.  How much you should pay depends on many factors, including the type of loan you’re applying for, the type of property you’re investing in, the lender you’re collaborating with, and more. However, you should expect to pay anything between 5% to 20% depending upon the purchase price of your home. 

High Ratio Mortgage – an Overview

By definition, a high-ratio mortgage, a.k.a loan-to-value ratio, is a type of loan that comes with under 20% of the down payment requirement. Here, the term high-ratio reflects the spread between the loan and the property’s purchase price. 

Unlike a few other types of mortgages, a high-ratio mortgage requires a borrower to pay mortgage insurance which is an additional premium included in your regular mortgage payments. The purpose of this insurance is to protect the lender in the event the borrower defaults.

Features of a High Ratio Mortgage

Below we have listed some of the most important features linked with a high ratio mortgage option which will help you understand the term better. 

• Mortgage insurance does not apply to houses that cost less than $1000,000. This is because of the fact that such assets usually require a minimum downpayment of 20% or more. 
• The maximum payback period for a high ratio mortgage is 25 years. You must opt for conventional mortgages if you need more time to pay your loan. 
• In order to pay for your mortgage insurance, you have to save for the downpayment on your own. You can also use money received as a gift or inheritance from your family for this purpose. Remember, you cannot borrow money to cover this cost. 

High Ratio Mortgage vs. Low Ratio Mortgage

As discussed above, a high ratio mortgage is a loan with a downpayment of less than 20%. On the other hand, a low ratio mortgage is one that has a downpayment requirement of at least 20% or more. 

Lenders usually consider high ratio mortgages a riskier option, and this is perhaps the reason these options come with mortgage default insurance (we’re going to talk about this in the following section of this article). 

Costs Associated with High Ratio Mortgages

A high ratio mortgage borrower is a high-risk buyer for the lender. This is why they ask for default mortgage insurance. Needless to say, the cost of insurance along with other costs add to the total cost of the mortgage, making it more expensive for the borrower in the long run.  

As far as the cost of default mortgage insurance is concerned, it can cost thousands of dollars. But the good news is you don’t have to pay all this amount upfront as the cost will be added to your monthly payments and eventually paid over time. 

High Ratio Mortgage – Pros & Cons

Sadly, borrowers don’t get enough choice regarding high or low ratio mortgages; it is still vital for every potential homebuyer to learn how each type affects them.

Pros

• The opportunity of owning your own house: A high ratio mortgage is a blessing for many homebuyers who do not have a lot of money to put down initially. With high ratio mortgages, you can easily become your desired house owner by paying a minimum of 5% downpayment in the start.

• Affordable interest rates: Lenders usually offer good interest rates to buyers who acquire a loan through a high ratio mortgage route. This is because of the fact that this type of mortgage comes with insurance which provides full coverage to the lender in case of any default.

Cons

• Restriction to pay mortgage loan insurance: Mortgage loan insurance adds a lot to your monthly mortgage payments, which is one of the biggest downsides of acquiring a loan via a high-ratio mortgage route.

• It can cost you more in the long run: While you get decent interest rates in the beginning, the restriction to pay up to 4.5% of your mortgages amount in loan insurance can become a huge burden over time. 

• Low payback period: With high ratio mortgages, you have to pay back the entire amount within 25 years, which isn’t exactly the case with conventional mortgages options that come with a maximum 35 years amortization cap. 

High Ratio Mortgages – Alternatives

In all honesty, there are not so many solid alternatives to high ratio mortgages. Just a few things if you want to avoid this mortgages option and look for a better alternative:

• Have enough savings in hand to pay a good downpayment in the beginning. 
• Don’t go with the options that are too expensive for your range. Make sure you stick to your budget and choose a property that won’t cost you an arm and a leg.