Over 6 million homes will be purchased in the U.S. each year in 2018 and 2019, according to a Freddie Mac forecast. Although some homebuyers might be able to pay cash, most people will need to take out a mortgage — and mortgage loans are not one-size-fits-all. Choosing the right type of mortgage for you is critical and can ultimately save you thousands.
Learn about the types of mortgage loans available and which one might be right for you before you start taking steps to buy a home.
Fixed-Rate Mortgage Loans
A fixed-rate mortgage loan is a conventional loan. With a fixed-rate mortgage, you’ll always know the amount of your monthly payment because your mortgage interest rate stays the same for the entire life of the loan. Fixed-rate mortgages are available for as long as 30 years, but other terms, such as 15 or 20 years, are also options.
The minimum credit score requirement for a conventional loan is typically 620 or higher. Borrowers can get a conventional loan with a down payment of as little as 3 percent. But, private mortgage insurance is required when your down payment is less than 20 percent
The difference between a 15-year versus a 30-year mortgage is this: Your monthly payments will be lower with a 30-year mortgage, but you’ll pay thousands less in interest if you can swing the higher payments that accompany the 15-year loan. A 15-year fixed-rate mortgage will cost you almost $5,000 less than a 30-year loan over seven years, according to myFICO.
Who Is a Fixed-Rate Mortgage Best For?
A fixed-rate mortgage is a good choice in these instances:
- You want the reliability of a fixed monthly house payment
- You don’t plan to sell your home for at least 10 years
- You want to lock in the current interest rate before it rises
Variable-Rate Mortgage Loans
A variable-rate mortgage loan, which is another type of conventional loan, is also known as an adjustable-rate mortgage or ARM, which means the rate will change over the life of the loan. When comparing the different kinds of mortgages, the variable-rate is the most unpredictable. ARMs are available in different adjustments: monthly, quarterly, yearly, every three years or every five years. There are also hybrid ARMs that combine a fixed-rate period with an adjustable-rate period; these are usually written like 7/3, 1/1 or 3/1. The first number indicates the length of the fixed-rate period while the second number denotes the adjustment frequency after the fixed-rate period has passed.
For example, in a 3/1 ARM, you’ll pay the same initial rate and payment for the first three years. Then, the rate will adjust one time per year for the life of the loan. In general, the shorter the initial term, the lower the initial adjustment rate. After your initial rate period ends, the interest on your loan will adjust, according to the current interest rate at that time. Depending on what the market is doing, you could end up with a higher or lower payment.
Who Is a Variable-Rate Mortgage Best For?
A variable-rate mortgage could be a good choice in these scenarios
- You plan to sell or refinance your home before the initial rate expires on the loan
- You want a lower monthly payment than what a fixed-rate loan can offer
- Forecasts predict mortgage interest rates might decrease in the future
FHA Mortgage Loans
An FHA loan is a mortgage that is backed by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. With FHA loans, qualifying borrowers can sometimes qualify for a better deal. There are times when you might want to choose an FHA loan over a conventional loan, such as if you cannot afford to put down a large down payment.
For FHA mortgages, down payments can be as low as 3.5 percent if you have a credit score of 580 or higher. You can expect to pay 10 percent down if your credit score is below 580. Borrowers with a credit score of less than 500 do not meet FHA loan requirements.
Additionally, FHA loans require that borrowers pay an Up Front Mortgage Insurance Premium, which is equal to 1.75 percent of the loan value. Borrowers must also pay a monthly mortgage insurance premium for at least 11 years, depending on the loan-to-value ratio.
Who Is an FHA Loan Best For?
An FHA loan might be right for you if:
- You are looking for a fixed- or variable-rate loan
- You don’t meet conventional loan credit score requirements
- You don’t have a large down payment available
Which Type of Mortgage Should You Get?
When choosing between different types of mortgages, it’s important to consider your personal financial situation, including how much money you can put down, as well as your preferred mortgage rate and term. Review the different mortgage options available to you and decide which is best for you. If you’re still unsure, talk to your mortgage lender for more information.
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