What You Need to Know About the Different Types of Mortgages
Choosing the mortgage that’s right for you can be really confusing and complicated, especially if you’re one of many buyers who has a lot of options to choose between. Do you go with the 30-year conventional or the 30-year FHA? What’s this USDA thing all about? This blog should help fill in what you need to know about the different types of mortgages.
Which Mortgage Type Is For Me?
There’s a lot that you’ll have to figure out between now and your home purchase, but the absolute biggest decision is what type of mortgage to sign at closing. Each type has some advantages, and some disadvantages, so it’s unlikely that you’ll end up hanging yourself if you don’t pick the best possible option. Still, you want to feel like you got the best deal possible on your home financing and that’s a fair goal to shoot for.
When you’re trying to figure out what mortgage is right for you, start by asking yourself these questions:
Mortgage Consideration #1: How much will I be spending?
Many mortgage programs have maximum or minimum limits on what they’ll loan, so knowing about how much you’ll have to spend to buy the home you’re dreaming of is the best place to start. This way you’ll know if you can use a standard loan or a jumbo loan.
For 2018, homes that are priced under $453,100 for most of the US or under $679,650 in higher priced areas, can be purchased with a standard loan of one of many varieties which will be discussed later. Fannie Mae, FHA, VA and USDA will all be willing to write these mortgages.
If your aspirations are above that price point, you’ll need a jumbo mortgage. Jumbos are a type of non-conforming conventional loan that banks often write and keep to themselves as portfolio loans. You’ll generally need around a 15 percent down payment, excellent credit and a debt-to-income ratio below 43 percent for a jumbo. However, because these loans are kept in-house, your lender may be somewhat flexible on these terms.
Mortgage Consideration #2: What’s my credit like?
Now that you know you’re not going to need a jumbo mortgage, you can start digging through some of the more common types of loans. Your credit rating will really make a big difference to where the conversation goes from here, though.
Excellent credit can score you a conforming conventional loan that will be bought by Fannie Mae or Freddie Mac. This is good news. They typically have low mortgage insurance rates for borrowers with less than a 20 percent down payment and the rates are also very good. There’s not a lot of paperwork to do for these loans, which also means less cost, so they’re often the best deal both coming and going.
Less than perfect credit doesn’t mean you’re down and out, you’ll just want to look at FHA, VA or USDA loan programs. They’re far more forgiving of a few missteps here and there. And while they may have additional fees and effort associated with them, they’ll still give you a firm foundation upon which to stand financially.
Mortgage Consideration #3: Do I belong to any special population?
Are you an ordinary Joe with nothing particularly special about you? That’s ok, a conforming conventional loan or an FHA will do just fine to get you on the road to homeownership. But if you belong to a special population, you may qualify for special financing programs.
Military veterans and their spouses, for example, can take advantage of VA mortgage loans. The rates are good, there are few fees and no mortgage insurance involved. The exact loan qualification requirements are fairly flexible, so long as you’ve got a good payment history and can provide your Certificate of Eligibility. You can borrow from the VA with as little as zero down.
People who live in rural areas, as classified by the US Department of Agriculture, may be eligible for USDA mortgages. These are very similar to VA loans in that they provide perks like low to no downpayments and somewhat flexible qualification requirements. The house itself will have to pass a USDA inspection, however, which can be grueling.
Other populations that might benefit from this question include low to middle income first time home buyers and minorities like Native American veterans.
Mortgage Consideration #4: How much can I bring as a down payment?
Even if you may qualify for a special population loan, you may choose to not take it for any number of reasons. In this case, you’ll want to ask yourself just how much money you’ve got to provide as a down payment. The mortgages mentioned above will be the only loans where you can get away with bringing almost nothing to the table; other types require a personal investment.
Both FHA loans and conforming conventionals have options that will allow you to bring as small as a three percent down payment to closing. However, choose carefully from here on. A conventional loan with a three percent down payment is no big deal. You’ll pay a little more in mortgage insurance over the long run, but over 30 years it won’t be that much more since the mortgage insurance will automatically drop off when you reach a 78 percent loan-to-value ratio.
If you bring less than 10 percent down for an FHA mortgage, on the other hand, you may be hung with mortgage insurance for the life of the loan. That’s 30 years of mortgage insurance unless you refinance, which is another headache of its own. If you only have three percent down and can get a conventional loan, go that route and you’ll save yourself the hassle and the money.
What About Adjustable Rate Mortgages?
Now that you know what type of mortgage makes the most sense in your situation, it’s time to discuss that mysterious three-letter abbreviation: ARM. If you want to give the ARM a go, consider these things:
- ARM is short for adjustable rate mortgage. The payment will eventually change and it may change dramatically when it does. You’ll want to have a plan in place before that happens.
- You may sell your home before the adjustment period begins. Depending on where you are in your life and how long you think you’ll stay put, your 7/1 or 10/1 ARM may not flex before you sell. If you think you’re not in it for the longer term, then you basically just got yourself a discount fixed rate mortgage…(just remember that it will flex if you hang around too long).
- You could save a substantial amount in interest even if you decide to refinance later. ARMs don’t always have a huge interest break involved, but many do. Before you choose one, do the math and figure out just how much interest you’re going to save by opting for an ARM. If you’ll save more than you’ll spend refinancing the note if you choose to stick around and pay that house off, you’re way ahead of the game already.
Getting Answers About the Different Types of Mortgages
If you’ve got more questions about the best mortgage for you and your family, just touch base with us here at Home.Loans! We’ve spent most of the day making a paperclip figure army, but we’ll delay the ultimate battle for control of the water cooler just for you.