What to know about mortgage rates in Alabama

Couple smiling at each other while sitting in a moving van, boxes behind them, happy that they found their new Alabama home.Image: Couple smiling at each other while sitting in a moving van, boxes behind them, happy that they found their new Alabama home.
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Alabama offers low property taxes as well as award-winning dining, world-class golf, and no shortage of art museums, film festivals and other cultural attractions. So it’s no surprise that nearly 5 million people call the state home.

If you’re searching for a home in Alabama, remember to shop around and compare mortgage rates. What may seem like a small difference could add up to thousands of dollars over the course of a 15-year or 30-year mortgage.

Mortgage debt in Alabama

On average, Credit Karma members with mortgages in Alabama had $144,093 of mortgage debt in 2020, with an average monthly mortgage payment of $991.

That puts Alabama a good bit below average for both mortgage debt and average monthly mortgage payments compared to Credit Karma members across the U.S. in 2020.

Types of home loans in Alabama

If you choose to finance your dream home, you might be overwhelmed with the number of mortgage loan options out there. Here are some of the more common mortgage types that Alabama homeowners may consider.

Conventional loans in Alabama

Conventional loans are mortgages that aren’t part of government programs. These loans tend to be good for people with solid credit and a down payment of at least 3% to 5%.

Alabama FHA loans

FHA loans are a good option for first-time homebuyers to explore — particularly if your credit is less than perfect. That’s because you may be able to qualify with credit scores as low as 580 with a 3.5% down payment or 500 with a down payment of 10%. This FICO® score requirement is the FHA minimum standard. In general, additional lender credit score requirements may apply.

The FHA loan limit in 2021 is generally $356,352 for a one-unit property, but it can reach as high as $822,375 depending on where you live.

Every area in Alabama conforms to the FHA loan limit of $356,362 in 2021.

You can find the limit by county on the U.S. Department of Housing and Urban Development website.

VA loans in Alabama

If you’re an eligible armed forces veteran or service member comparing mortgage rates in Florida, a VA loan can be attractive — down payments and mortgage insurance aren’t typically required and you may be able to qualify even if you don’t have great credit.

VA loans are guaranteed by the government but typically issued by private lenders.

Conforming loan limits in Alabama

Conforming loans are a type of home loan that meets certain loan limits set by the Federal Housing Finance Agency. This means they can be bought by Fannie Mae and Freddie Mac, government-sponsored companies that guarantee mortgages.

Loans that exceed conforming loan limits are known as jumbo loans. Lenders often consider these loans riskier than conforming loans.

All of Alabama’s counties have a conforming loan limit of $548,250 in 2021.

First-time homebuyer programs in Alabama

If you’re hoping to buy your first home, there may be some assistance programs available to you in Alabama from the Alabama Housing Finance Authority.

  • AHFA Step Up — AFHA Step Up offers an affordable 30-year fixed-rate, conventional or government-backed loan for first-time and repeat homebuyers. This loan is offered through a network of participating lenders and includes down payment assistance in the form of a 10-year second mortgage for up to 3% of a conventional loan and 3.5% for an FHA mortgage. To be eligible, you must meet minimum credit score requirements, have a maximum income of $130,600, and have a debt-to-income ratio of 45% or lower. You’ll also need to complete a homeownership education course.
  • AHFA Affordable Income Subsidy Grant – This grant is offered for those applying for conventional mortgages (but not FHA) and provides a grant for closing costs. Income, credit score and debt-to-income ratio limits apply — and homeownership education is required.
  • AHFA Mortgage Credit Certificate — With the AHFA Mortgage Credit Certificate, you can reduce your federal tax bill. You may get between 20% and 50% of your mortgage interest, and depending on your loan size, up to $2,000 per year as a tax credit. Applications are accepted on a first-come, first-served basis.

AHFA’s Step Up and the Income Subsidy Grant programs may be combined with the Mortgage Credit Certificate.

Mortgage refinancing rates in Alabama

If you’re thinking about refinancing your mortgage in Alabama, keep a few things in mind.

  • Break-even cost — Once you know the closing costs for your refinance, you can use any savings on your monthly mortgage payment to calculate how long it will take you to recoup that investment and “break even.”
  • Cash-out refinance — Have you accumulated equity in your home that you’d like to convert to cash? A cash-out refinance lets you refinance your home for more than what you owe and get cash in return. But remember that you’ll owe the full amount plus interest, and the equity in your home will be less if you sell in the future. 
  • Loan term — You also may want to either shorten or extend your loan term. For instance, if you have a 30-year mortgage, you may want to convert it to a 15-year loan. Keep in mind that reducing your term likely means you’re paying more each month — but less in interest over time. Lengthening your loan term may mean you pay less each month, but more interest over the course of the mortgage.

About the author: Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt Un… Read more.