Have you thought about the different ways that you can finance your new home? There are many different types of loans and mortgages that can be a perfect fit to what you are looking for, but finding that perfect option requires a little research and some help from a local loan officer. Start off by getting more familiar with the different types of mortgages that you can get!
Option 1: Fixed Rate Mortgage Loans vs. Adjustable-Rate Mortgage Loans
Fixed-Rate Mortgage Loans
This is the traditional type of mortgage that gets paid off over a set amount of time with a specific interest rate. The set amount of time can be 10, 15, 20, or 30 years.
- Pros: Because the payments are fixed, the interest rate and the monthly payments will roughly remain stable throughout the loan term. This option also offers the benefit of predictability since the rate never changes.
- Cons: The commitment may not be worth it if you are not planning to stay in the home long-term. Choosing a different type of mortgage that is more flexible, such as an adjustable-rate mortgage maybe be more ideal for you and allow you to have more security in paying off the home in however long the loan term is.
This mortgage type is usually the best option for homeowners who plan to stay in a home long-term. Although the interest rate is lower when the loan term is shorter, the loan term for this kind of mortgage should depend on what your ideal payment per month is until the home is paid off. Keep this in mind as you consider the pros and cons of this mortgage type if you are planning to live in this home either short-term, such as 5 to 10 years or long-term, such as 30 or more years. That should help you decide whether a fixed-rate mortgage loan is the one for you.
Adjustable-Rate Mortgage Loans
This type of mortgage has an interest rate that changes from time to time. This rate usually changes every year after being fixed for a short time period.
- Pros: This type of mortgage has an interest rate cap that limits how much the rate can change from one month to another over the loan term.
- Cons: The interest rate fluctuates and is unpredictable because you only know when the rate is adjusted and not how it is adjusted, so you may come across the risk of having to refinance your loan term since the rate and monthly payments can rise over time.
This type of mortgage is usually the best option for homeowners who only plan to stay in the home for a few years. There are several different types of adjustable-rate mortgages, such as 3/1. 5/1, 7/1 and 10/1. 3/1 means that the interest rate remains fixed for 3 years before adjusting every one year. The same goes for 5/1, 7/1 and 10/1, where the interest rate remains fixed for five, seven, or ten years. Like it was stated previously, keeping in mind the pros and cons of this mortgage type as well as whether you are planning to stay in the home short-term or long-term should help you decide whether an adjustable-rate mortgage loan is the one for you.
Option 2: Conventional Loans vs.Government-Insured Loans
This type of loan is a loan that isn’t insured by the government and is made entirely in the private sector.
- Pros: You can avoid mortgage insurance entirely, but be aware that only a down payment of 20% or more will be eligible to skip paying for mortgage insurance because a down payment that’s less than 20% will require you to pay for the mortgage insurance.
- Cons: Private mortgage insurance may be costly.
If you are able to afford a down payment of 20% or more, then it would be best to use a conventional mortgage loan so you could avoid the extra insurance cost. People with smaller down payments have a tougher decision to make. Compare the private mortgage insurance rates with the ideal down payment you’d like to put down in order to make the the best decision to choose whether a conventional loan is the one for you.
This type of mortgage is managed by the Department of Housing and Urban Development, which is a department under the federal government. This type of loan is designed for first-time home buyers who can’t come up with a large down payment, but is also available for all types of home buyers. With this type of loan, the government insures the lender against losses that might result from borrower default.
- Pros: This type of mortgage allows you to make a down payment as low as 3.5% of the purchase price, which reduces the down-payment expense. It is also easier to get this type of loan approved compared to a conventional loan because the government is less strict about the types of borrowers that they are willing to ensure. With this type of loan, you can be approved to buy a home even if you have a low credit score.
- Cons: You’ll have to pay for mortgage insurance and other fees, which will increase the size of your monthly payments.
There are many benefits with government-insured loans that have more lenient qualifications for approval, but make sure to still have your finances in check. Decide whether you would want to make a larger or smaller down payment and also how much mortgage insurance you’d like to pay in order to make the best decision for whether a government-insured loan is the one for you.
Option 3: Jumbo Loans vs. Conforming Loans
For these two types of mortgages, first consider the guidelines of Fannie Mae or Freddie Mac, who are two government-controlled corporations that purchase and sell mortgage-backed securities. Their guidelines include credit, income, assets requirements, and sizes of the loans.
This type of mortgage exceeds the loan limits in Fannie Mae and Freddie Mac’s guidelines. This type of mortgage has a higher risk for the lender because of the size. Borrowers who choose this type of mortgage usually have good credit and are able to put down larger down payments.
- Pros: This type of mortgage allows you to buy a higher-priced home and allows you to have more flexibility with need mortgage insurance even when the down payment is less than 20%.
- Cons: Higher interest rates and down payments are needed for this type of mortgage as well as good credit. These qualifications make it harder to qualify for this type of mortgage.
This type of loan meets the loan limits in Fannie Mae and Freddie Mac’s guidelines and allows lenders to package loans into investment bundles to sell them and lend again.
- Pros: It is easier to qualify for and and can have a lower mortgage interest rate. This type of mortgage may also offer a lower down payments as can be more lenient with credit scores.
After getting a little more familiar with the different types of mortgages you can choose from for yourself, find one that suits you best and be sure to consult with a local loan officer to start the home buying process in the right direction. Good luck!