Choosing the Best Mortgage
Updated: May 1, 2019
Take inventory of your debts, credit score, income and bills to help you choose between a government or conventional, fixed- or adjustable-rate and conforming or non-conforming mortgage. Buying a home is probably the largest purchase you’ll make in your lifetime. And choosing the right type of mortgage loan is one of the most important decisions you’ll make. With so many different options out there, it can be hard to find an affordable home loan that meets your financial goals.
FHA loans, insured by the Federal Housing Administration, were established to make homebuying more affordable, especially for first-time buyers, by allowing down payments as low as 3.5% of the purchase price.
VA loans are insured by the Department of Veterans Affairs and offer buyers low- or no down payment options and competitive rates. They’re available to current military service members and veterans only.
USDA loans are backed by the U.S. Department of Agriculture and are geared toward rural property buyers who meet income requirements.
All three programs follow the limits for conforming loans and have low down payment requirements.
Conventional loans, on the other hand, are offered and backed by private entities such as banks, credit unions, private lenders or savings institutions. Borrowers need good credit to qualify. This is because the loans aren’t guaranteed by an outside source — so the possibility of borrower default poses a greater risk for lenders.
Conventional loans have terms of 10, 15, 20 or 30 years. They typically require larger down payments than government-backed loans. Borrowers normally put down 5%, but that amount can vary based on the lender and the borrower’s credit history. Some Conventional programs allow down payments as low as 3%
If you don’t have a lot of cash saved up for a down payment but have solid credit and a stable income, a government-backed loan is likely the way to go. Keep in mind that if you choose a conventional or government-backed loan and you’re making less than a 20% down payment, you’ll have to pay for private mortgage insurance.
If you can afford to save up a large down payment and build your credit score while lowering your debt-to-income ratio, a conventional loan is a great choice that can eliminate some of the extra fees and higher interest rates that may come with a government-backed loan.
Interest rate: Fixed or adjustable
Once you’ve chosen your loan, you’ll decide whether you want a fixed rate or an adjustable rate. Your choice determines the interest you’ll be charged.
Fixed Rate Loans have interest rates that never changes. If you’re settled in your career, have a growing family and are ready to set down some roots, a 15- or 30-year fixed-rate loan might be your best bet, because you’ll always know what your monthly mortgage payment will be. It’s worth noting, though, that if other fees are rolled into your monthly mortgage payment, such as annual property taxes or homeowner’s association dues, there may be some fluctuation over time.
Adjustable-rate mortgages, or ARMs, have interest rates that reset at specific intervals. They typically begin with lower interest rates than fixed-rate loans, sometimes called teaser rates. After the initial term ends, the interest rate — and your monthly payment — increases or decreases annually based on an index, plus a margin. They most often appeal to younger, more mobile buyers who plan to stay in their homes for just a few years or refinance when the teaser rate is about to end. Paying a lower interest rate in those initial years could save hundreds of dollars each month that could fund other investments.
The bottom line
All of these options might seem overwhelming at first glance. But bear in mind that the type of loan you wind up getting will depend largely on your credit profile, income and overall financial goals. Before you start shopping for a home loan, schedule a no obligation call with our team to review your financial picture and see what mortgage options fit your needs the best!