No matter if you’re a first-time buyer or have owned your home for many years, there are various mortgage types available and each has advantages and drawbacks that make it suitable for different homeowners. Selecting the correct mortgage is essential in the home buying process since it can make or break your dream of homeownership and help save you money on interest payments over time.
Conventional mortgages, the most popular type of mortgage, are not guaranteed by government agencies like Fannie Mae or Freddie Mac and instead issued by private lenders. These mortgages adhere to stringent criteria regarding creditworthiness and debt-to-income ratios – providing greater affordability for buyers.
A conventional mortgage offers the advantage of more manageable monthly payments than a Federal Housing Administration (FHA) loan, which may have higher credit requirements and upfront or ongoing mortgage insurance fees. If you’re low income or first-time homebuyer, a conventional mortgage could help eliminate mortgage insurance costs, making your monthly payment lower and saving interest over the life of the loan.
For those looking to commit for the long haul, fixed rate mortgages are the way to go. These popular loans usually feature a 30-year term with your interest rate fixed for that duration.
Another option is an adjustable-rate mortgage (ARM), which offers an introductory period when your interest rate remains fixed. After that period has elapsed, it changes periodically according to an index of market interest rates. While you may pay more with an ARM in the short run than with a fixed-rate loan, it could become more affordable in the long run if interest rates go up significantly.
3/3 ARMs and 3/1 ARMS
Other less common mortgage options include interest-only or payment-option ARMs that feature complex repayment schedules and often require large balloon payments at the end of the ARM. These mortgages may be suitable for those with a strong financial history and significant down payment, though they come with risks too.
Nonconforming loans are mortgages that don’t adhere to government-backed credit and debt-to-income ratios, making it less likely you’ll qualify for a conventional mortgage. They tend to be cheaper than conforming loans and may be suitable for people with negative items on their credit report. Nonconforming loans tend to offer better terms than conforming ones and may be an affordable alternative for those with credit issues.
For the best mortgage choice, consult a knowledgeable lender who can clearly explain all your available options. Request them to create a loan worksheet and compare the costs of different loans side by side.
Concluding Your Loan Decision: When looking for a mortgage, consider your income, assets, debt and property location when making decisions. Doing this will help narrow down the numerous mortgage options and identify which one best meets your individual needs.