With almost two hundred different options available for your next mortgage, how do you choose the right one for you? After closer examination, though, you’ll find that there are actually only about six or seven basic types of home mortgages. You'll want to base your mortgage decision on several key factors, including your current monthly income, your future expected income, your current assets, and your liabilities or debts.
First, Determine How You'll Pay Interest
The first important decision to make is whether you want to take a change on an interest rate that changes (adjustable-rate mortgage) but is lower initially, or you'd just feel more comfortable paying the same amount each month, even if it's a higher initial rate.
Fixed-Rate
Mortgage
- Oldest and most popular
- Rate is constant over the life of the loan
- Can be taken out in 10, 15, 20, or 30-year lengths
- Your payments are the same every month and very predictable
Adjustable-Rate
Mortgage (ARM)
- Interest rate is initially low, then fluctuates with the market, which means rates can drop or increase
- Rates are usually based off of one-year Treasury securities or another specific index, such as the Cost of Funds Index
- Regulated by the federal government, caps on interest rate changes
- Usually a cap of two points, lifetime ceiling caps of around six points
Two-Step
Mortgage
- Often called 5/25's and 7/23’s
- Always a 30-year loan
- Offers an initial fixed interest rate for the first 5 to 7 years, then converts to current market rates
- Can be convertible, which gives the buyer the option of choosing another fixed-rate loan at current market rate
- Can be nonconvertible, which automatically switches to an adjustable-rate loan
- Often chosen by buyers who plan on moving or refinancing before the initial fixed-rate period
Now Find the Right Loan
Once you've determined how you'll calculate interest on your loan, it's time to determine how you will finance your loan and how it will be set up. Here are some of your options.
Conventional
Mortgage
- Offered by private banks, credit unions, savings institutions, or other lenders
- Isn’t guaranteed or insured by the federal government
- Usually has strict qualification requirements and a 20% down payment
- Loan term is typically 15, 20, or 30 years, fixed rate or adjustable
- Conforms to the loan limits and laws of Freddie Mac and Fannie Mae
- Loans that do not conform (due to the loan being larger than those allowed for the area) are called jumbo loans
FHA Mortgage
- Government-backed loan with more flexible loan qualifications and credit requirements
- Interest rates may be higher and can be fixed or adjustable
- Lower down payments required, usually 5% or as low as 3%
- Loan cap amounts are set by the median prices of different cities within a particular area
- Steep mortgage insurance premium and other upfront costs are usually required
- Often used by buyers with lower credit or income who might have trouble qualifying for a conventional loan
VA Loans
- Designed to help military vets buy homes with as little as zero down payment
- Loan is through a private lender and guaranteed by the VA so mortgage insurance isn't required
- Easier to qualify for than a conventional mortgage, less strict credit and income requirements
- One-time funding fee that varies depending on the size of the down payment and type of veteran
- VA rules regulate the amount that can be charged for closing costs, which may even be paid by the seller
- Can be maximum loan amounts set by the specific location of the home
Balloon Mortgages
- Usually a short loan of 5 to 7 years, but with a monthly payment based on a term of 30 years
- At the end of the loan term, you must pay off the outstanding balance, or refinance, sell, or convert your mortgage
- Can be interest only (pay off the interest first, then lower payments of just the principal until the loan is due)
- Can be amortizing (principal and interest throughout the loan)
- Often have lower interest rates, can be easier to qualify for
Shared-Appreciation
Mortgages
- Lender offers you a below-market rate in exchange for a share of the profits when the home is sold
- You receive the tax benefits
- Lender doesn’t make money unless you do
- If home increases greatly in value, you’ll lose a lot of profit to the lender
- Most common among first-time homebuyers working with non-profit groups that help low to moderate income families
Biweekly Mortgage
- You pay half the amount of a monthly payment
- You make 26 payments per year (instead of 12 payments monthly)
- Cuts down on the amount of interest over the life of the loan
- Paying so often can be a drawback
Still Have Mortgage Question or Ready to Get Started?
Still not sure which type of loan is best for you or searching for the resources to learn more? Contact us so we can connect you with a local mortgage specialist who can help you best explore all of your options. It's a good idea to meet with lenders and complete the pre-qualification process before you begin searching for a home so that you know what type of loan you qualify for and which homes will be in your price range.
Want to learn more about buying a home in Johnston County or Wake County? We've got plenty of tools and resources to help you learn more about the home-buying process, the area, and the types of homes for sale you'll find here. And don't be afraid to contact us if you have any questions, concerns, or you're ready to get started!