When deciding which type of mortgage to get, you'll be faced with a lot of things to consider. You need to compare costs, interests, taxes, down payments, eligibility, and other factors.
For a first-time homebuyer, all these choices might seem overwhelming. No need to worry, though. We've created an easy-to-understand guide to help you decide which option is best for you.
A conventional loan is not backed by the federal government but by Fannie Mae or Freddie Mac, which are government-sponsored enterprises. The eligibility criteria for this mortgage are the following:
Most borrowers are required to pay Private Mortgage Insurance (PMI). But if you make a down payment of 20%, you will be allowed to skip this fee.
If you are not eligible for a conventional mortgage, you can apply for FHA loans. FHA loans have less strict credit score requirements and lower down payment—usually about 3.5%. However, all FHA borrowers are required to pay insurance, called the MIP or Mortgage Insurance Prime.
Backed by the Federal Housing Administration, FHA loan is oriented for low-income and moderate-income borrowers.
The different types of mortgages can be placed in two broad categories: conforming and non-conforming.
Conforming loans refer to mortgages that meet the underwriting standards set by Fannie Mae and Freddie Mac. At the same time, it also conforms to the limit set by the Federal Housing Finance Agency (FHFA). Conforming loans has lower interest rates, meaning you'll have lower monthly payments.
Non-conforming loans, on the other hand, exceed these limitations. It is an option for people with higher income, since they demand strong credit history, proof of sufficient cash reserves, and at least 10 to 20% of the mortgage as the down payment.
The mortgage term can either be long-term or short-term.
If you want to pay as little as possible for your monthly payments, choose long-term offers. However, this would also mean that you'll have a higher interest rate.
A short-term mortgage would be the other way around. You'll pay higher monthly payments but will have a lower interest rate.
The types of interest rates are an important factor to keep in mind as well.
Fixed mortgage rates are more popular among borrowers because it makes budgeting easier. With this type of mortgage rate, you'll be paying the same monthly charges regardless if the principal and interest changes. This will last for the whole mortgage term.
Adjustable mortgage rates also start with a fixed payment period that can last up to 10 years. After that, the payment will vary depending on the current market price of the interest rate. It's riskier compared to a fixed mortgage rate since you'll never know whether the rates will rise or drop. However, the adjustable mortgage rate has its advantages. During the fixed-rate period, your monthly payment can be lower than a fixed mortgage rate. Hence it is a good option if you want to own a house for a few years and will sell it once the fixed period expires. But remember that you cannot sell or refinance the house before the initial period.