What Mortgage Loan is Right for You?

Wondering what type of mortgage loan is best for you? While a professional lender can walk you through your options in detail, we can give you a head start. Read on to get a basic understanding of the loans available to you.
Fixed-rate vs. Adjustable-rate
The first choice you’ll have to make is whether you want a fixed-rate loan or an adjustable-rate loan. A fixed-rate loan keeps the same interest rate for the entire repayment period, which can be 10, 15, 20 or 30 years. An adjustable-rate loan (ARM) has an interest rate that will change from time to time, but your initial interest rate will be lower. Adjustment intervals are predetermined and there are minimum and maximum rate caps to limit the size of the adjustment, so you won’t be hit with huge monthly fluctuations. There are different types of ARMs offered. One example is the 5/1 ARM, where your interest rate is set for five years then adjusts annually for 25 years.
Conventional vs. Government-insured
Aside from choosing between fixed-rate and adjustable-rate, you’ll also have to decide whether you want a government-insured loan such as FHA or VA (if you qualify), or a “regular” conventional loan.
FHA, VA and USDA loans are backed or guaranteed by the government. A Federal Housing Administration (FHA) loan is designed for those who can’t come up with a large down payment or don’t have the best credit. This loan is a popular choice for first-time buyers, although it’s available to all types of buyers. Your down payment can be as low as 3.5 percent and your credit score must be 580 or higher. In some cases, a score as low as 500 may be accepted with 10 percent down. The catch: you have to pay for mortgage insurance, which increases the size of your monthly payments.
A Veterans Administration (VA) loan is available to qualifying veterans, active military and military families. This type of loan usually requires no down payment or mortgage insurance. If you qualify, this is almost always the best choice.
A USDA (United States Department of Agriculture) loan is intended to help those with steady, low or moderate income who intend to buy in rural areas but are unable to purchase a home through conventional financing. If you are eligible, no down payment is required and you can get a below-market mortgage rate. Income must be no higher than 115 percent of the adjusted area median income (AMI), which varies by county.
Conforming vs. Jumbo
The last thing to consider is the size of the loan. A conforming loan meets the guidelines of Fannie Mae or Freddie Mac, two government-controlled corporations that purchase and sell mortgage-backed securities. These guidelines are pre-established limits, including credit, income, asset requirements and loan amount.
If your loan exceeds these limits, it’s a jumbo loan. This loan poses a higher rick for the lender due to its size, therefore it requires excellent credit, a larger down payment and a higher interest rate. But a jumbo loan allows you to purchase a higher-priced home if you can afford it. Also, if the down payment is less than 20 percent, it might not require mortgage insurance.
Although this information will give you a basic understanding of your options, it is best to talk to a professional local lender to help determine what loan is right for you.