How to Choose the Right Mortgage Loan?
Buying a home is a big milestone, but navigating the various home loan options can feel overwhelming. While your mortgage lender will help you find the best fit, it's helpful to understand your choices.
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Key Takeaways
1
A mortgage involves repaying the borrowed sum plus interest over a set timeframe.
2
Monthly mortgage payments include principal (the loan amount) and interest (the borrowing cost).
3
The APR reflects the loan's total cost, combining interest and fees.
4
Various mortgage loan types—conventional, FHA, VA, and USDA—offer options based on financial situations, with specific requirements for each.
5
The choice between fixed-rate and adjustable-rate mortgages affects long-term financial planning, highlighting the importance of selecting the right mortgage.
Table of Contents
What Are the Main Types of Mortgage Loans?
What Is a Mortgage Loan?
A mortgage is a loan used to buy a home, where you agree to pay back the borrowed amount, plus interest, over a set period.
Understanding Your Mortgage Payment Structure
Your monthly mortgage payment consists of two parts:
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Principal: Payments on the original loan amount
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Interest: The charge for borrowing money from the bank
Payments are made monthly according to an amortization schedule determined by the lender.
The annual percentage rate (APR), which includes the mortgage interest rate and any additional fees, assesses the total cost of the loan.
The 4 Main Mortgage Loans
Determining the correct type of mortgage loan for your situation depends on several factors. Below, we'll discuss some of the most common loan types and their requirements.
Conventional Loans
Conventional loans are popular among borrowers due to their flexibility. They cater to a wide range of credit scores and down payment options (as low as 3% down).
Down Payment Requirement: 3%-20%; down payments under 20% will need to pay for private mortgage insurance (PMI) monthly.
Credit Requirement: Generally require a minimum credit score of 620 and a debt-to-income ratio under 36%.
FHA Loans
Low- to moderate-income homebuyers purchasing their first home typically turn to FHA Loans when they can’t qualify for a conventional loan.
Down Payment Requirement: As low as 3.5% down, but up to 10%, based on credit score.
Credit Requirement: Minimum required score of 500; 580 or higher is needed for minimum down payment requirements.
Additional Considerations: FHA loans require the buyer to pay Private Mortgage Insurance (PMI) for 11 years or the life of the loan, dependent on the down payment.
VA Loans
The U.S. Department of Veterans Affairs (VA) guarantees homebuyer loans for qualified military service members, veterans, and their spouses. Borrowers can finance 100% of the loan with no required down payment.
Credit Requirement: There is no established minimum, but typically, credit scores need to be in the 600s with a debt-to-income ratio of no more than 41%.
Other Benefits: Include a lower closing cost, better interest rates, and no private mortgage insurance payments.
USDA Loans
The U.S. Department of Agriculture (USDA) guarantees loans for buyers who plan to buy in rural or small suburban areas and are often subject to property value caps and income caps.
Down Payment Requirement: Little to no money down is typically required for qualified borrowers as long as the property meets the USDA’s eligibility requirements.
Credit Requirement: Minimum score of 640 to qualify; must have an established, positive borrowing history or meet alternative criteria.
Additional Considerations: Monthly USDA loan payments must be no more than 29% of the buyer’s income.
Need Home Loan Assistance?
Connect with one of FSB's experienced mortgage lenders today for personalized guidance.
Fixed Rate vs. Adjustable Rate Mortgage
Explore the key differences between fixed-rate and adjustable-rate mortgages to determine which option aligns best with your long-term goals.
Fixed-Rate Mortgages
A fixed-rate mortgage loan has an interest rate set for the entire loan term, which allows the buyer to have a predictable monthly payment for the life of the loan.
This type of term is best for those planning to stay in their home for a long period.
Stable Payments: Interest rate remains the same, ensuring predictable monthly payments.
Refinancing Option: If interest rates drop, refinancing could lower payments.
Term Varieties: Varying term lengths, with 30 years being the most common – 15 and 10-year options are also potentially available.
Adjustable Rate Mortgages (ARM)
An adjustable-rate mortgage (ARM) begins with an initial fixed rate for a pre-determined period. Once this period ends, the rate will automatically adjust with market rates.
This type of term is best for those planning on moving before the rate adjusts.
Initial Fixed Period: Starts with a fixed rate, then adjusts to market rates.
Rate Fluctuation: Payments may increase or decrease based on interest rate changes.
Common Terms: Typically a 30-year term, with the initial rate stable for five years, then adjusting annually.
Understanding How Arms Work
If you're considering an Adjustable Rate Mortgage (ARM), a common option is the 5/1 ARM.
The "5" means the interest rate stays fixed for the first five years, while the "1" indicates it adjusts once per year starting in year six.
ARM rates change over time and are controlled by three caps: initial, periodic, and lifetime.
For example, a 5/2/5 cap structure means three caps on the interest rate. These numbers mean:
Initial Cap (5): Maximum points above the initial interest rate that your rate can increase in the first year.
Periodic Cap (2): Maximum points your rate can increase in subsequent years after the first year.
Lifetime Cap (5): Maximum amount your interest rate can increase over the life of the loan.
FSB's Mortgage Lenders can help navigate ARMs to find a comfortable term and structure despite their complexity.
Connect with FSB's Mortgage Team
When choosing your mortgage, it's important to consult with a qualified mortgage lender. They can provide expert advice, review your financial situation, and help you find the loan type and term that best fit your needs and goals.
Choose between FSB's online application or this quick inquiry form to get started!
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