When looking for a mortgage, it’s important to understand which kind is likely to bring you the most reward for your hard-earned money. Researching your options may also help ensure you do not run into unexpectedly high payments or other surprises later on.
Some basic facts to understand about the four most common types of mortgages include:
Generally if you have an established credit history and can put down a minimum amount on a home, you may qualify for a conventional fixed-rate loan. Lenders generally limit these loan amounts based on the location of the home. Larger loans are known as "Jumbo" and have different loan limits and down payment requirements.
Fixed-rate mortgages typically come with a lower interest rate than FHA or VA loans and are usually faster to process, with less documentation required. They retain the same interest rate through the life of your loan, offering peace of mind that the monthly principal and interest payments won't become unmanageable. One trade-off is that you may pay more total interest over the life of the loan, but there are options to refinance down the road so you can take advantage of better interest rates.
If they conform to Fannie Mae and Freddie Mac guidelines, adjustable-rate mortgage (ARM) loans usually call for you to put a certain percentage of the loan amount down and more for Jumbo loans, which are sometimes required for more expensive homes. Usually the rates are figured over the life of the loan, incorporating lower interest rates than fixed-rate mortgages, with the first several years (depending on your agreement) locked into the initial interest rate. After the initial fixed interest rate period, the interest rate may rise or fall on an annual basis. This fluctuation is what makes these loans “adjustable rates.”
ARMs may be attractive to those planning to make improvements to the property and resell quickly, or those relocating during the initial fixed interest rate period of the loan. Many borrowers take advantage of initially low payments, using the money saved for other investments or to get their mortgages paid down faster.
Federal Housing Administration (FHA) loans
These government-backed mortgage loans are often a good fit for those with less cash in hand, as the required down payment may be a relatively small percentage of the loan amount. Due to the high loan-to-value ratio, FHA loans may come with higher interest rates than conventional mortgages and may require monthly mortgage insurance payments. Typically, the lower the down payment, the higher the interest rate. The maximum loan amount varies by state and county, but the home must be a primary residence and meet other conditions checked during an FHA-approved appraisal.
Veterans Administration (VA) mortgage loans
This government-backed and usually low-interest option may be your best bet if you or your spouse are veterans or members of the military. A VA loan is advantageous in that it requires little or no down payment, it employs a simplified process and it negates mortgage insurance premiums. A VA Certificate of Eligibility is required. Many refinance existing mortgages into VA loans to get the better loan terms.
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