Are you getting ready to buy your new home?
A mortgage is the largest financial commitment most of us will make in our lifetime, so it is important that you make the best choice possible.
Choosing the wrong type of mortgage could cost you a great deal in the long run, but with so many types of mortgage, it is easy to get overwhelmed.
Don’t worry, we are here to help. Read on to learn how to choose the best type of mortgage loan for your situation.
Work Out What Can You Afford
A mortgage is a very large financial commitment, so it is important that you work out exactly what you can afford. As well as your down payment, there are also taxes, closing costs, insurance and other hidden fees you need to account for.
The easiest way to do this is to use a mortgage calculator.
Work out exactly what you will be able to afford and don’t be swayed by overenthusiastic mortgage lenders. You know more about your financial situation than they do, and you need to make sure to leave room in your budget for living costs.
Build Your Down Payment
The terms of your mortgage aren’t just dictated by your income. The size of your down payment also plays a large role.
The larger your down payment, the better terms you are likely to get. It also helps to cushion you financially by giving you immediate equity. This will protect you from any downturns in the real estate market that could see you owing more than your house is worth.
Before committing to a mortgage, save as much for your down payment as you can. Even if this delays your purchase for a few months, it will pay dividends down the line.
The Loan Payment Term
The term of your loan will dictate your finances for decades to come, so it is important you make the right call.
Carefully check your finances and work out exactly what you can afford to pay each month. Make sure you don’t just look at the monthly repayments. A shorter mortgage term means higher repayments but lower interest on your borrowing.
Overall this means you will be paying back less and will have more time to invest and save for retirement.
Mortgage Types
Not all mortgages are the same. Here are the most common mortgage loans, and where they are best suited.
Conventional Mortgages
A conventional mortgage should be considered the baseline mortgage type.
There are rules to follow on credit and employment history, but these are accessible for most households. A 3% down payment is required, but in order to avoid paying for private mortgage insurance, you normally need to be able to make a 20% down payment.
Fannie Mae and Freddie Mac provide most “standard” conventional mortgages.
Nonconforming Mortgage Loans
Nonconforming mortgages are loans that do not meet the requirements set by the government. The most common type of non-conforming mortgages are “jumbo” loans, which are larger than the loan limit for the local area. These are riskier for the lenders, so large down payments are standard.
In certain parts of the country with high house prices, “Jumbo” loans are the only realistic option for house purchases. They are only suitable if you have strong credit and a large down payment.
FHA Loans
Government-Insured FHA Loans are available with lower down payments and credit score requirements than conventional loans. However, they require you to pay a mortgage insurance premium for the period of the loan.
These mortgages are best for low-income households that are unable to qualify for a conventional mortgage or afford a large down payment. You can obtain one with a credit score as low as 500.
USDA Loans
The U.S. Department of Agriculture can guarantee loans for low-income families in rural areas. These loans can entirely remove the need for a down payment as long as the property is eligible.
If you live in a rural area, it is well worth checking if you are eligible, as they are often the best option for low-income families.
Reverse Mortgage
Mortgages aren’t just for buying a house. You can get a “reverse mortgage” to release the equity in your home. This is effectively taking a loan out against the property, but without the need to make any repayments. Instead, the loan is repaid in full when the borrower sells the home or passes away.
Reverse mortgages are perfect for older homeowners who need to free up equity in their retirement. These services are available from several institutions, such as The Steven J Sless Group.
Fixed-Rate Vs Adjustable-Rate
Fixed-rate mortgages have a set interest rate for the entire repayment period of the loan. Adjustable-rate mortgages have a fixed rate for a part of the period, after which they fluctuate with the market.
Fixed-rate is perfect if you are intending to stay in your home for the long term. They guarantee your payments will not change unexpectedly over the life of your loan.
An Adjustable-rate mortgage is riskier as you have no control over the interest rate after the fixed period. However, as the fixed-rate portion is often lower than the rate on a fully fixed mortgage, they are better if you intend to sell or refinance before the fixed period is up. Doing so could save you thousands of dollars on interest.
The Best Type of Mortgage Loan for You
As you can see, there are many mortgage types that can make choosing the best type of mortgage loan quite difficult.
It is always best to take a conventional mortgage as a baseline and compare your other options against that. You should always investigate whether you are eligible for federal or local mortgage schemes, as these are often the most attractive. Think about your income, down payment and how long you intend to live in a property before committing to any mortgage type.
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