If you’re reading this, that means you’re planning to buy a new home. Congratulations! This is a big step in your life. But, before you get to buy your new home, you have to choose a mortgage first. A mortgage is basically a loan that allows you to purchase a house. The loan can come from a bank, an online lender, or a mortgage lender. Did you know that there are several mortgage options to choose from?
Mortgages have different lengths and rates. Knowing each mortgage’s pros and cons can help you save tons of money and avoid any financial problems in the future. You should also consult a professional mortgage broker to analyze your financial situation to help solidify your decision. It’s also important to understand mortgages personally so that it’s easier for you to decide with your broker. Here you will learn about the different kinds of mortgages to determine the right mortgage for you.
Fixed-rate mortgage
As the name suggests, this kind of mortgage offers a fixed interest rate throughout the mortgage’s lifetime. This is the most conventional mortgage, and most people actually prefer this over other mortgages because of the stability it provides. There are two kinds of fixed-rate mortgages: a 30-year fixed mortgage and a 15-year fixed mortgage.
A 30-year fixed mortgage has a fixed interest rate for 30 years. The great thing about this mortgage is that the monthly payment is more affordable than the 15-year fixed mortgage and other short-term mortgages. You can also avail of this mortgage with a small down payment percentage of 3.5%. However, because the mortgage takes so long to pay off, lenders will usually give them a higher interest rate to reduce the risks on their end. This is the best mortgage for you if:
- You want to buy a home but currently have a small budget
- You want predictable and stable interest rates
- You want steady monthly payments
- You don’t mind paying off your mortgage for 30 years
A 15-year fixed mortgage, on the other hand, has a fixed interest rate for 15 years. It has the same idea behind the 30-year fixed mortgage but is done in a shorter amount of time. The interest rate of a 15-year fixed mortgage is lower than the 30-year fixed mortgage. It’s great because you pay off your mortgage in less time and with a lower interest rate. However, because the length to pay off the mortgage is lower, the monthly payments are higher. This is the best mortgage to get if:
- You don’t mind the higher monthly payments
- You want to pay off your mortgage in less time and with lower interest rates
- You want predictable and stable interest rates
- You want steady monthly payments
Adjustable-Rate Mortgage
Also known as an ARM. As its name states, unlike the fixed-rate mortgage, an ARM will have adjusting rates based on market conditions. That means your monthly mortgage payment could either go up or down after the introductory period. The reason why people opt for an ARM is because of the low-interest rate during the introductory period. This is the best mortgage to get if you plan on moving homes after the introductory period.
Getting an ARM can be stressful, especially when there’s a possibility for your monthly mortgage payment to spike or skyrocket. Yes, there is a chance that it will go down, but if you plan on living in your home passed the introductory period, you should opt for a fixed-mortgage instead. That way, it will feel less like a gamble for you.
Federal Housing Administration Loans
Better known as FHA loans. This loan is great for those with a low credit score. It was specifically created to provide those with low to moderate-income with the ability to purchase a home. The government insures an FHA loan; this brings certain advantages and disadvantages. Because it is government-insured, you won’t have to worry about losing money if you can’t continue to pay off the loan. The disadvantage, however, is that you must pay a mortgage insurance premium upfront.
Veterans Affairs Loans
This loan was created for people who have served or are serving the military and their spouses. If you’re an active or retired member of the military (or the spouse), you can purchase a home with this loan and pay no mortgage insurance premiums. Aside from that, you also have a $0 down payment. You do have to pay a funding fee, though.
U.S. Department of Agriculture Loans
The USDA loan was created for people living in eligible rural areas, such as those that have populations of 10,000 or less and are low-income earners. The pros of this loan are that you can avail of a 0% down payment. But, you do have to pay a mortgage insurance fee and a mortgage insurance premium monthly.
Jumbo loan
A jumbo loan is a kind of non-conforming mortgage loans. Meaning they go outside the borrowing limits of regular mortgages set by the Federal Housing Finance Agency (FHFA). That means loans that reach as high as $500,000 or more. This is usually the type of loan you’d want to get if you live in a high-cost area such as San Francisco. It is harder to get a jumbo loan because it’s riskier for the lender, and you’d have to pass a lot of requirements.
Jumbo loans often have a higher down payment rate, like 20%. You’ll also need a high credit score, around 700. It would help if you also had a lower debt-to-income ratio; around 40% is the minimum.
Now that you’ve got an idea of the different kinds of mortgages, you should visit your mortgage broker to see which of these mortgages will best suit your financial needs. You must pick the right mortgage for you because this will affect the future of your financial health. Picking a mortgage is like picking a home. You want to pick the one that you can see having a great future with.
