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When it comes to buying a house, most people know what they prefer: a bungalow or a condo, a hot neighborhood or a sleepy street.
Mortgages, too, come in many styles – and recognizing which type you should choose is just slightly more involved than, say, knowing that you prefer hardwood floors over wall-to-wall carpeting.
First things first: To pick the best loan for your situation, you need to know what your situation is, exactly. Will you be staying in this home for years? Decades? Are you feeling financially comfortable? Are you anxious about changing loan rates?
You’ll want to have an understanding of the different loans that are out there. There are lots of options, and it can get a little complicated – but you got this. Here we go.
Lets you lock in an interest rate for 15 or 30 years (there are also 20 year loans as well). That means your monthly payment will stay the same over the life of the loan. (That said, your property taxes and insurance premiums will likely change over time.)
A 30-year fixed-rate mortgage offers a lower monthly payment for the loan amount (for this reason, it’s more popular than the other option, the 15-year).
A 15-year fixed-rate mortgage typically offers a lower interest rate but a higher monthly payment because you’re paying off the loan amount faster.
Offers a lower interest rate than a fixed-rate mortgage for an initial period of time – say, five or seven years – but the rate can fluctuate after the introductory period is over, depending on changes in interest rate conditions. And that can make it difficult to budget.
It’s ideal when: You plan to live in a home for a short time or you expect your income to go up to offset potentially higher future rates.
Different lenders e initial interest rate but different rate caps. It’s important to compare rate caps when shopping around for an ARM.
Adjustable-rate mortgages have a reputation for being complicated. As the Consumer Financial Protection Bureau advises, make sure to read the fine print.
A general rule of thumb: When comparing adjustable-rate loans, ask the prospective lender to calculate the highest payment you may ever have to make. You don’t want any surprises.
Which fixed-rate or adjustable-rate mortgage you qualify for introduces a whole host of other categories, and they fall under two umbrellas: conventional loans and government loans.
Your Stress Free-Guide to Shopping for Home Loans
Offer some of the most competitive interest rates, which means you’ll likely pay less in interest over the period of the loan.
Who qualifies? Typically, you need at least a credit score of 620 or above and a 5% down payment to qualify for a conventional loan.
If you put less than 20% down for a conventional loan, you’ll be required to pay private mortgage insurance, an extra monthly fee designed to mitigate the risk to the lender that a borrower could default on a loan. (PMI ranges from about 0.3% to 1.15% of your home loan.) The upshot: The lender has to cancel PMI when you reach 22% equity in your home, and you can request to have it canceled once you hit 20% equity.
Most conventional loans also have a maximum 43% debt-to-income ratio, which compares how much money you owe (on student loans, credit cards, car loans, and other debts) to your income – expressed as a percentage.
Fannie Mae and Freddie Mac set limits on how much money you can borrow for a conventional loan. A home loan that conforms to these limits is called a conforming loan:
Jumbo loans typically require a higher down payment (up to 30% for some lenders) and a credit score of at least 720. Some borrowers can qualify while putting down 20%, but their credit score has to be higher.
There are practical considerations to take into account before getting a jumbo loan too, mainly: Are you comfortable carrying that much debt? The answer depends on your current financial situation and long-term financial goals.
There are other types of loans. You should reach out to your trusted REALTOR for suggestions of lenders to speak with for help.