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The most common type of mortgage is the conventional 30 year, fixed-rate mortgage – but there are plenty of other options out there that will cater to your specific financial needs. Learn about the different types of mortgage loans on the market, and then decide which type best fits your future home ownership goals.

Start by answering this series of questions to narrow down what features you should be looking for in a mortgage:

• How long do you plan on living in this home?
• Do you have money saved up for a down payment?
• Do you believe your income will stay the same or increase in the coming years?
• Are you looking for an interest rate that stays the same or will change down the road?
• What’s more important to you – a lower interest rate or a lower monthly payment?

Fixed Rate Mortgage Loans

This is the most conventional and popular type of mortgage.  The components include the loan amount, interest rate, and loan term. Many assume these loans are only available in terms of 30 years, but both 10 and 15 year term lengths are options. The biggest perk is that your interest rate will stay the same for the entire life of your loan, which means your monthly payment will stay the same as well.

Example:

You buy a $200,000 home with a $40,000 down payment. Your loan amount will be $160,000. If the interest rate is 3.92% and the term is 30 years, your monthly payment will be $757. The total dollar amount you will spend on principal and interest over 30 years is $272,341.

Ideal for:

The buyer who is able to afford at least a 5% down payment, likes the security of knowing exactly what their payment will be in the coming years, and is planning on staying in the home for a long period of time.

Adjustable-Rate Mortgage Loans (ARMs)

With this type of mortgage, the interest rates are lower and more competitive than fixed rate mortgages.  However, after the initial period of the loan, the interest rate will change – and you should prepare for it to change to a higher interest rate.  There are minimum and maximum caps set on the rates, so make sure you know what the highest possible interest rate is that you may be paying down the road.

Example:

The most popular type of ARM is a 5/1 arrangement. This means that you will get the lowest interest rate for the first five years of your loan. After that period ends, the interest rate will update according to current market trends every following year.

Let’s apply this to the $160,000 loan amount we used above. For the first five years, you get a lower interest rate of 3%, making your monthly payment just $647.57. After that five year period ends, experts predict that the interest rate will adjust upward by .25%. The maximum cap is set at a 12% interest rate, which would make your monthly payment $962.16 in the worst case scenario. The estimated total amount of principal and interest you would pay over the 30 year life of the loan is $298,911.

If you stayed in your home five years or less, you would pay less than the fixed rate mortgage, but the fixed rate mortgage would equal less over the 30 year loan term.

Ideal for:

The buyer who is able to afford at least a 5% down payment, desires a lower monthly payment but is okay with that payment amount fluctuating in the future, and is not planning on spending a long period of time in their home.

Federal Housing Administration Mortgage Loans (FHA)

These mortgages are insured by the government and give the lender the security they need to offer more appealing interest rates and be more flexible on their approval qualifications. The cost of the insurance premiums are passed on to you through an up-front premium that can be included in the total loan amount and annual premiums added to your monthly payments.

Down payments as low as 3.5% are accepted, even for those with credit scores as low as 580. Another perk is that the FHA allows home sellers, home builders, and lenders to cover some of the closing costs for the borrower to incentivize the purchase.

A common misconception is that these loans are offered directly from government. Instead, normal lenders simply have to be FHA-approved. This means that you can shop for FHA loans at different financial institutions to look for the best rates and terms, just like any other mortgage shopper.

Ideal for:

The buyer who is unable to afford a 5% down payment or is having trouble getting approved for conventional loans due to bad credit.

Veteran Affairs Mortgage Loans (VA)

These loans are provided by private lenders and insured by the Department of Veterans Affairs. They are only available to veterans and active members of the military. Some of the advantages to these types of loans are flexible credit score or down payment requirements, low fees, attractive interest rates, and instead of the insurance premium being passed on to the buyer – the VA covers the cost of the insurance.

You can find out if you’re eligible for a VA mortgage here.

Ideal for:

The buyer who is either an active military member or veteran, or the surviving spouse of a veteran who died during their military service.

Still Have Questions?

If you’re still not sure what option may be best for you, have a heart-to-heart with your Mortgage Specialist.  They will be able to help you decide what type of mortgage loan best fits your situation.

Important Considerations

Can you afford a down payment?

A down payment is a percentage of the purchase price of the home that the buyer pays upfront when taking out a mortgage.  It is required with most types of mortgages and allows the lender peace of mind by knowing that you, as the buyer, have made a substantial up-front investment.

The exact amount of your down payment depends on the type of mortgage you decided upon above.  The percentage can range anywhere from 5%-25% of the home’s purchase price.  However, the lender will always encourage you to pay a higher percentage.

Will you need private mortgage insurance (PMI)?

If your down payment equals less than 20% of the home’s purchase price – be prepared to pay your lender private mortgage insurance.  This protects the lender in case payments are not made on the loan.

PMI is incredibly common for first time home buyers, since not many have cash for a 20% down payment.  The cost of your insurance will probably be rolled into your monthly payment.  As with any type of insurance, you usually have options. Make sure to talk with your mortgage specialist about the type of PMI that you’ll be paying for, and shop the options that are best for you.

Shopping for your mortgage is not the most fun aspect of buying a home, but it is vital to ensuring the security of your financial future. Buyers who don’t educate themselves before jumping into the process can quickly become overwhelmed or choose a mortgage that is wrong for their situation. You’re now a step ahead in your financial education, but there are numerous other factors to consider before buying your home.

To learn more about every step of the home buying process, download our FREE guide today! Whether you’re a first time buyer or just need to brush up on your knowledge, the First Time Home Buyer’s Guide will tell you what you need to know to make home ownership a smart financial decision.