Unless you can buy your home entirely with cash, finding the right property is only half the battle. The other half is choosing the best type of mortgage. You’ll likely be paying back your mortgage loan over a long period of time, which is why it’s important for you to find a loan that meets your budget and your needs.
When choosing a mortgage, don’t just focus on the interest rate and fees you’ll be charged. You also need to consider what type of mortgage you want. Many types of mortgage loans exist, and they are designed to appeal to a wide range of borrowers' needs.
Once you’ve done some homework and nailed down a budget and a down payment amount, and you’ve reviewed your credit, you’ll have a better idea of what type of loan works best for your needs.
1. Conventional Mortgages
A conventional mortgage is a home loan that is not backed or insured by the federal government. There are two types of conventional mortgages: conforming and non-conforming loans.
A conforming loan simply means that the loan amount falls within maximum limits set by Fannie Mae or Freddie Mac, two government-sponsored enterprises (GSEs) that back most mortgages in the United States. The types of mortgage loans that don’t meet these guidelines are considered non-conforming loans.
In general, most lenders will require you to pay for private mortgage insurance on many conventional loans when you put down less than 20 percent of the home’s purchase price.
Note: Conventional loans are ideal for borrowers with strong credit, a stable income, good employment history, and who can afford a down payment of at least 3 percent.
2. Jumbo Mortgages
Jumbo mortgages are conventional types of mortgages that have non-conforming loan limits. This means the home price exceeds federal loan limits. Jumbo loan limits vary by county and are adjusted periodically. Here are this year's loan limits
Jumbo loans are more common in higher-cost areas, and generally require more in-depth documentation to qualify.
Note: Jumbo loans make sense for more affluent buyers purchasing a high-end home. Jumbo borrowers should have good to excellent credit, a high income, and a substantial down payment. Many reputable lenders offer jumbo loans at competitive rates.
3. Government-Insured Mortgages
The US government isn’t a mortgage lender, but it does have a hand in helping more Americans become homeowners. Three government agencies back mortgages: the Federal Housing Administration (FHA loans), the US Department of Agriculture (USDA loans), and the US Department of Veterans Affairs (VA loans).
- FHA Loans — An FHA mortgage is a home loan insured by the Federal Housing Administration. FHA loans are backed by the government and are designed to help borrowers of more modest means to buy a home. These types of loans help make homeownership possible for borrowers who don’t have a large down payment saved up and don’t have great credit.
- VA Loans — VA loans are mortgages backed by the Department of Veterans Affairs and are available to military service members and veterans. VA loans provide flexible, low-interest mortgages for members of the US military (active duty and veterans) and their families.
- USDA Loans — USDA home loans are mortgages backed or issued by the U.S. Department of Agriculture. USDA loans help moderate- to low-income borrowers buy homes in rural areas.
4. Fixed-Rate Mortgages
Fixed-rate mortgages keep the same interest rate over the duration of your loan, which means your monthly mortgage payment always stays the same. Fixed-rate loans typically come in terms of 15 years, 20 years, or 30 years.
Note: If you plan to stay in your home for at least seven to 10 years, a fixed-rate mortgage might be the best option as it offers stability with your monthly payments.
5. Adjustable-Rate Mortgages
Unlike the stability of fixed-rate loans, adjustable-rate mortgages (ARMs) have fluctuating interest rates that can go up or down with market conditions.
An adjustable-rate mortgage is a home loan with an initial rate that’s fixed for a specified period, then adjusts periodically. For example, a 5/1 ARM has an interest rate that is set for the first five years and then adjusts annually.
Note: If you don’t plan to stay in your home for more than a few years, an ARM could save you a lot on interest payments.
Before moving forward with any mortgage, carefully consider your financial situation. Review your circumstances and needs, and do your research so you know which types of mortgage loans are most likely to help you reach your goals.
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