Homebuying Guide: What Type of Mortgage is Best for Me?
It takes both research and effort to find the best mortgage product in the market. An experienced loan officer will help you understand your options, but it pays to get started earlier. In this article, we’ll discuss the available mortgage options and their pros and cons.
Fixed-Rate or Adjustable Rate Loans
It’s the first challenge you face. You have to decide whether you need a fixed or adjustable rate. The most common type of loan is the 30-year, fixed-rate mortgage. You continue to pay the loan, and the interest rate remains constant for the entire loan repayment period. Market conditions can change, but your interest rate won’t. Fixed-rate products come in variations such as the 10-year, 15-year, 25-year, and 30-year plan. Typically, the smaller the duration, the lower the interest rate. When choosing between a 15-year, and 30-year plan, your preference should be the 15-year mortgage.
The amortization schedule is such that you first pay the interest rate, and then the principal amount. Let’s compare the 15-year mortgage with the 30-year plan. You get a lower interest rate. Furthermore, you pay the interest rate quickly in the first few years, and then all your payments go toward the home equity. If you take a 15-year mortgage and a 30-year loan, the short-term loan provides more significant savings compared to the long-term investment.
Adjustable-rate mortgages are also available, and typically, they have a lower interest rate compared to fixed-term plans. However, ARMs don’t provide you with security. If you are looking to move out in the next few years, then go with an ARM because you can secure the best rates. The interest rate is constant for the initial years, and there will be a cap limit for the adjustment period. Review the cap limit to see how far the interest rates can go. There are four types of adjustable-rate mortgage products:
- 3/1 ARM
- 5/1 ARM
- 7/1 ARM
- 10/1 ARM
The lending rate will be consistent for 3,5,7 or 10 years, respectively, and it will adjust annually.
Govt. Loans Vs. Conventional Mortgages
When seeking a mortgage product, you have to decide about the financial institution. FHA loans are available to people with a low down-payment and not the ideal credit score. You can qualify for an FHA loan even with a credit score of 580 and a 3.5% down payment. If your credit score is even less, you can get a loan with a 10% deposit. However, these types of mortgages have associated fees, such as the upfront mortgage insurance premium. You’ll also pay mortgage insurance if your down payment is less than 20%. You’ll continue to pay the insurance premium unless you pay the loan in full or you refinance.
Conventional mortgages have strict qualification criteria, but they don’t have upfront charges. A monthly mortgage insurance fee is charged when you deposit less than 20% for the down payment; however, the cost is waived when your loan-to-value ratio reaches 78%. To be eligible for a conventional loan, you need a good-to-excellent credit score, low DTI, and stable income.
Veterans Administrative (VA) Loans
Qualifying veterans and active military members can get the VA mortgage. If you are eligible for this option, you can get a mortgage with 0% down payment and no mortgage insurance premium. If you are a veteran or an active military member, then a VA loan is the best option for you.
The US department of agriculture issues such types of loans to promote lifestyle in rural areas of the country. Some suburban regions can qualify too. You can get this type of mortgage if you are living in the specified area. Eligible candidates can get a loan with no down-payment and below-market rates.
Jumbo Vs Conforming Loans
The last part of the process is to consider whether you need a jumbo mortgage or a conforming loan. Most people choose the latter. It is the one that conforms to the Fannie Mae & Freddie Mac guidelines regarding credit, income, and loan amount. In most parts of the country, the maximum you can borrow for a conforming loan is $417,000.
Jumbo loans give you access to an extended sum of money. A private mortgage insurance fee is not applied even if the down payment is less than 20%. However, it is difficult to qualify for a jumbo loan as they come with high interest-rate, and often require an excellent credit score and a sizeable down payment. The bank might require a cash reserve worth 12 months of mortgage installments.
Why would you take a jumbo loan? The obvious answer is that if you can afford the payments, you can purchase a big house. You’ll need to do your homework before applying. All lenders are not willing to issue a jumbo mortgage, and it can be a challenge to acquire this loan after a short sale or a foreclosure.
Second Mortgages/Home Equity Loan
A primary mortgage is secured to finance a house. A secondary mortgage is subordinate to the first mortgage. A second mortgage is secured against the equity of your home. The lender will finance a maximum of 80% of your home value. You can obtain a home equity loan if your down payment is more than 20%. Let’s say; you make an initial investment of 30%. You can choose to borrow that sum by using a home equity loan.
It is essential to understand a second mortgage from the perspective of a mortgage lender. A home equity loan gets a second preference against the first mortgage. In case of default, the second mortgage is paid after the first loan is paid in full. That’s why high interest-rates are attached to home equity loans.
The best reason to use a second mortgage is to pay off high-interest debt, such as student loans and credit card debt. You can tap into your home equity. The cash can be used to consolidate debts.
Finding the right mortgage product remains a challenge, even when you are equipped with the best knowledge and tools. It takes years of experience to identify the lender & the product that’ll best suit your needs.
Our experienced mortgage solutions team can help you find the right product for your needs. We’ll negotiate the best interest rates so that you don’t have to worry about getting the second best. Connect with Helloblue to start your home buying journey.