How to Choose the Best Mortgage Program
When it comes to the process of obtaining a mortgage, one size doesn’t fit all. There are a plethora of options out there, and it might take a bit of research to find the one that is the best for you.
The good news is there are a variety of different types of loans – which means whether you’re a first-time or a seasoned homebuyer, you can find one that will work for you.
The different types of loan products can be broken down into simpler terms to make it easier to determine your best option – read on for details.
Fixed-rate vs. adjustable-rate mortgages
Generally speaking, you’ll want to first consider whether you want a fixed-rate or an adjustable-rate mortgage (ARM).
Fixed-rate – This is exactly how it sounds – the interest rate you start with is the one you’ll have for the life of the loan unless you refinance. This means your monthly principal and interest payment will be the same for as long as you own the home.
Adjustable-rate – This type, often referred to as an “ARM,” has an interest rate that will fluctuate from time to time. Most ARMs have an initial fixed period, where the interest rate doesn’t change, and then after that it will often change year-to-year – such as the 5/1 ARM, where the fixed rate lasts 5 years and then adjusts annually after that period.
Considerations
Clearly, this is a big decision and one not to be taken lightly. There are several factors to consider first:
How long do you intend to live in the home? If you plan to stay long-term, a fixed-rate mortgage might suit you best so you won’t face any dramatic payment increases way down the road. On the contrary, if you know you’ll only be there a short time before moving somewhere else (for a job or military assignment), you might find an ARM better serves your needs.
Are you comfortable with your monthly mortgage payment fluctuating? If you have wiggle room in your budget, an ARM might work for you. Because ARMs often have lower initial mortgage rates, you can save money during that initial period that you may otherwise shell out if you had a fixed-rate mortgage. Just remember — after the initial rate period ends, your rate (and monthly payment) may increase.
Conforming vs. jumbo loans
The amount of money you need to borrow to purchase a home will determine whether a conforming or jumbo loan is best for your needs.
Conforming loan – This type falls within the Fannie Mae and Freddie Mac conforming limits, which are set annually by the Federal Housing Finance Agency. For 2017, the conforming limit was $424,100, with some higher-priced regions going as high as $636,150. As of January 1, 2018, the base conforming loan limit is $453,100.
Jumbo loan – This is the type of loan you would need if you wanted to obtain a mortgage above the conforming limits. You’ll need a high credit score and low debt-to-income ratio in order to take advantage of this loan.
Government vs. conventional loans
Another big consideration to make when choosing a mortgage program is whether you prefer a government-insured or conventional loan. When it comes down to it, cold hard cash is generally the influencer behind this decision.
Conventional – This type is not insured or guaranteed by the federal government, but often still has good interest rates and loan terms. Typically, you will need to make a larger down payment in order to obtain this type of loan, so may not be the best option if you don’t have a lot of cash sitting around. However, there are conventional products that allow lower down payments, such as 5% down.
Government-insured – There are several types of government-insured loans, and arguably one of the biggest benefits of choosing one of these is the fact you can put little – or in some cases, zero cash down. If you can afford a monthly payment but haven’t saved for a large down payment, this type of loan might be better for you.
FHA Loan – FHA loans are available for all borrowers and allows you to put down as little as 3.5% of the purchase price. You will be required to pay mortgage insurance, which will increase your monthly mortgage payment.
VA Loan – This is available to military service members and their families. The big advantage of a VA loan is the fact you can forego the down payment altogether and receive 100% financing for purchasing a home.
USDA Loan – The USDA loan is available for rural borrowers who meet specific income requirements. Similar to an FHA loan, you will need to obtain Upfront Mortgage Insurance; however, you can finance 100% of the purchase price and avoid a down payment.
Why choose conventional?
With so many benefits stemming from government-insured loans, you may be wondering why someone would choose a conventional loan instead. Well, if you happen to have a down payment and great credit, you may find the conventional loan terms more favorable, and you can avoid mortgage insurance premiums if you can put down at least 20% of the purchase price.
Experienced homebuyers may prefer this type of home loan, since they will often have equity from selling a home to use as a down payment on a new home.
Why choose government-insured?
A government-insured loan allows you the flexibility to purchase a home even if you don’t have a significant amount of cash on hand. If you’re first-time homebuyer, this type of mortgage will generally be your best bet. Just be sure you review the loan types carefully, as FHA and VA loans in particular have additional approval requirements for certain property types like condos and can’t be used for purchasing a vacation home.