After you’ve figured out how much you’d like to borrow from a lender, your next step in getting a home loan is deciding what kind of loan to choose. There is a range of mortgage choices available, so you have the ability to select the right one for you. That’s a good thing, but it can be a lot of information to take in, so be sure to educate yourself.
Fixed Rate vs. Adjustable Rate
Fixed-rate mortgages have the same interest rate and monthly payment for the entire life of the loan, whether that’s five, 15, 30 years or more. This type of loan is a good option when rates are low and you plan to own the home for a long period of time. Adjustable-rate mortgages, also known as ARMs, have interest rates that can change at set intervals during the life of your loan. This type of loan is a good option when rates are high and you only plan to own the home for a short time.
Conventional vs. Government-Backed Loan
With conventional loans, a private lender assumes the risk of losing money if you default on your mortgage. A government-backed loan is insured, either completely or partially, by the U.S. government. Federal Housing Administration and Veteran Affairs loans are well-known types of government-backed loans.
Federal Housing Administration (FHA) Loan
FHA loans are available to anyone who meets the FHA lending guidelines and maximum loan amounts. Because the FHA insures the loan and lowers the risk for the lender, this mortgage type is more likely to offer competitive interest rates, less strict credit requirements and low down payments. An FHA loan is a good option for first-time homebuyers, although buyers should be aware of the monthly insurance payments you’ll likely have to pay for choosing this over a conventional loan.
Veteran Affairs (VA) Loan
A VA loan is available to eligible veterans, spouses and other beneficiaries. Similar to FHA loans, the risk is lower, so this mortgage type offers a competitive interest rate often without requiring a down payment or private mortgage insurance.
Conforming vs. Non-Conforming Mortgages
Conforming mortgages meet specific standards set by Fannie Mae and Freddie Mac, the government-sponsored institutions that buy loans from banks. Non-conforming loans do not meet those standards, which means they are less likely to sell on the secondary mortgage market — and lenders offset the risk by charging a higher interest rate.
Once you have a short list of mortgage options to choose from, ask your lender if there are pre-payment fees if you pay off the loan early, and how much the lender will charge. Fees can vary from lender to lender and are sometimes negotiable — all the more reason to shop around!