Which Type of Mortgage Is Right for You?

Not all mortgages are the same. The kind of loan you choose will affect your monthly payments and your stress level. Here’s a brief guide that will help you make the right decision.

Conventional vs. Government-Backed Loans

Most homebuyers take out a conventional mortgage through a bank or credit union. You can get a mortgage from an institution you already do business with, but you don’t have to. It’s wise to shop around and get quotes from different lenders.

Government-backed mortgages generally have lower minimum credit scores and lower down payment requirements than conventional loans. Government-backed mortgages are guaranteed by the federal government, but you’ll have to apply through a private lender.

Federal Housing Administration loans are available to buyers with low credit scores who might not qualify for conventional mortgages. You’ll be able to get an FHA loan with a down payment as low as 3.5%, but you’ll have to pay for mortgage insurance premiums to protect the lender in case you default. You’ll be required to keep MIP for 11 years if you put down at least 10%. If your down payment is less than 10%, you’ll have to keep MIP for as long as you have the loan.

Some government-backed mortgages are only available to specific groups of people. The Department of Veterans Affairs backs mortgages for active-duty service members, veterans, and surviving spouses, while the Department of Agriculture backs home loans for buyers in rural areas.

Fixed-Rate vs. Adjustable-Rate Loans

You can choose a fixed-rate mortgage, with an interest rate that won’t change, or an adjustable-rate mortgage, with an interest rate that can go up and down. When you understand the pros and cons of each, you’ll be able to decide which makes more sense for you.

With a fixed-rate mortgage, the amount you pay each month for principal and interest will remain the same for as long as you have the loan. If your homeowners insurance premiums or property taxes change, your total monthly bill can rise or fall, even if the amount you pay for principal and interest doesn’t change.

An adjustable-rate mortgage has a low introductory rate that can last for several years. After that, the rate resets from time to time based on economic conditions. If you have an ARM, your monthly payments can go up or down, and changes can be small or huge.

Most homeowners choose fixed-rate mortgages because they offer security and predictability. An ARM might be a good choice if you don’t plan to stay in your new home for a long time. You’ll be able to take advantage of a low introductory interest rate, then sell the house before the rate resets.  

Mortgage Terms

Your loan term is the number of years it will take you to pay off the balance. Most lenders offer mortgages with terms of 15 or 30 years, but longer and shorter terms are also available.

If you choose a shorter term, you’ll have higher monthly payments and will pay off the loan faster. Since mortgages with shorter terms are less risky for lenders, they generally have lower interest rates. That means you’ll spend less on interest over the life of the loan.

Explore Your Loan Options

Start by figuring out which types of mortgages are available to you. If you have a low credit score or you don’t have much money for a down payment, you might not be able to get a conventional loan. In that case, you’ll want to focus on government-backed mortgages. If you’re eligible for both conventional and government-backed loans, get quotes for both.

Think about how long you plan to live in your new house, how much you can afford to spend each month, and how comfortable you are with risk. That will help you figure out if you’d be better off with a fixed or adjustable interest rate and a longer or shorter term.

Each lender has its own requirements and makes decisions in its own way. If you provide the exact same information to a few lenders, they might offer you mortgages with a range of interest rates. A small difference in interest rates can have a big impact on the total amount of interest you’ll pay. Request quotes from a handful of lenders so you can find a loan with the best terms available.

Arm Yourself with Information

Buying a house is complicated. Choosing a mortgage is just one of the many decisions you’ll have to make. One mistake can cost you thousands of dollars.

Before you take the plunge, learn how things work. The First-Time Homebuyer Masterclass covers key topics like how to choose a mortgage, how to find a house that fits your budget, and how to avoid common mistakes. Enroll now.

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