What Mortgage is Best For You? A Breakdown of Common Residential Loan Options

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Buying a home is a major investment, and it is likely you will need to secure a mortgage or loan to purchase. There are a variety of options available which can be confusing, so finding a lender you trust can help you understand the best fit for your circumstances.

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Watch: Common Home Loan Options Available

Overview of Mortgage & Home Loan Options

When it comes to paying off your mortgage loan, either fixed-rate loans or adjustable-rate loans are the typical options. Fixed-rate loans come with a locked interest rate, making your monthly mortgage payment the same and keeps budgeting predictable. The fixed-rate loan terms are usually 15 years, 20 years or 30 years. For borrowers who are planning to stay in their home for at least seven years, fixed-rate mortgages are a good fit. If rates were to significantly drop, that’s when the option to refinance your loan to reduce payments is something to consider.

Adjustable-rate mortgages, or ARMs, start with a lower fixed rate for a period of time but it is a variable interest rate. After a certain time, the interest rate will be adjusted up or down annually based on market conditions.

Conventional Mortgages

Not insured by the federal government, there are conforming or non-conforming loans with standards set by Fannie Mae and Freddie Mac. Based on your down payment percentage, private mortgage insurance (PMI) may be required. Conventional mortgages can be used for a primary home, second home or investment property. Borrowers who have strong credit, stable income and employment history are ideal candidates for these types of loans.

  • Conforming Mortgage Loans ❘ The loan amount falls within the Federal Housing Finance Agency maximum limits.
  • Non-Conforming Loans ❘ Refers to loans that do not meet FHFA guidelines, including the most common type called Jumbo Loans.

    Jumbo Loans are conventional mortgages when the home price exceeds federal loan limits. This type of loan makes sense for pricier homes and borrowers with excellent credit, higher incomes, and substantial down payments.

Government Loans

Approved lenders can complete the loan, but in the event of a default the government insures the loan. These loans are open to repeat and first-time buyers, and help borrowers who don’t qualify for a conventional loan. Common Government Loans include:

  • FHA Loans ❘ Backed by the Federal Housing Administration, this loan usually allows for lower down payment and credit score but also requires monthly mortgage insurance premium (MIP) which will add to your monthly mortgage payment. Requires an FHA Appraisal, which is focused on safety of the property. If the property does not pass appraisal, borrowers may not get approved for an FHA loan on that particular property.
  • VA Loans | Specifically for active-duty or veteran servicemembers and backed by the U.S. Department of Veterans Affairs, this loan does not require mortgage insurance. There is a wide range of rate, term and cost options, including low or no down payments and lower closing costs.
  • USDA Loans | Backed by the U.S. Department of Agriculture, they help moderate- to low-income borrowers buy home in rural areas. This type of government loan can have lower mortgage insurance payments and may not require a down payment.

Other Home Loan Types

When looking at your loan options or discussing with your Loan Officer, you may encounter these types of loans:

  • Balloon Mortgages | While payments are based on a longer (30 year) term, there is only a short time at the beginning where monthly payments are made. Instead, a large payment is required at the end of the loan term which could be unmanageable unless properly planned for.
  • Construction Loans | For a borrower looking to build their home, this type of loan would be something to consider.

Read Our Related Article: 8 Key Steps To Know Before Building Your Dream Home

Committing to a mortgage is a big decision that’s personal and different for everyone. To better understand what loan option meets your unique needs, reach out to us! We can discuss these in greater detail, including exploring grants or other funding availability that might be possible depending on your qualifications.

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