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How to Choose the Right Mortgage Loan?

Tammy Yamilkoski

 

Buying a home is a significant milestone, yet it can be overwhelming with the various home loan options. While your mortgage lender can quickly identify which mortgage loan type most closely aligns with your financial situation, understanding your options is beneficial.

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Key Takeaways

  • A mortgage involves repaying the borrowed sum plus interest over a set timeframe.
  • Monthly mortgage payments include principal (the loan amount) and interest (the borrowing cost).
  • The APR reflects the loan's total cost, combining interest and fees.
  • Various mortgage types—Conventional, FHA, VA, USDA—offer options based on financial situations, with specific requirements for each.
  • The choice between fixed-rate and adjustable-rate mortgages affects long-term financial planning, highlighting the importance of selecting the right mortgage based on individual needs and market conditions.

Table of Contents

  1. What Is a Mortgage Loan?
  2. What Are the Main Types of Mortgage Loans?
  3. How Do Fixed Rate and Adjustable Rate Mortgages Differ?
  4. Connect with a Mortgage Lender

What Is a Mortgage Loan?

A mortgage is a loan for buying a home, where you agree to pay back the borrowed amount, plus interest, over a set period.

Understanding Your Mortgage Payment Structure

Your monthly mortgage payment consists of two parts: the principal, which is the original loan amount, and the interest, which is the charge for borrowing the money. Payments are made monthly according to an amortization schedule determined by the lender.

The annual percentage rate (APR), which includes both the mortgage interest rate and any additional fees, assesses the total cost of a loan.

The 4 Main Mortgage Types

Determining the correct type of mortgage loan for your situation depends on several factors. Below, we'll break down some of the most common loan types and the requirements for each.

Conventional Loans

Conventional loans are popular among borrowers due to their flexibility, catering to a wide range of credit scores and down payment options (as low as 3% down).

  • Down Payment Requirement: 3%-20%; down payments under 20% will need to pay for Private Mortgage Insurance (PMI) included in their monthly payment
  • Credit Requirement: Generally require a minimum credit score of 620 along with a debt-to-income ratio under 36%

FHA Loans

Low- to moderate-income homebuyers purchasing their first home typically turn to FHA Loans when they can't qualify for a conventional loan. Insured by the Federal Housing Administration, these loans allow potentially under-qualified buyers the opportunity to purchase a home.

  • Down Payment Requirement: As low as 3.5% down, but up to 10%, based on credit score
  • Credit Requirement: Minimum required score of 500; 580 or higher needed for minimum down payment requirements
  • Additional Considerations: FHA loans require the buyer to pay Private Mortgage Insurance (PMI) for 11 years or the life of the loan, dependent on the down payment amount

VA Loans

The U.S. Department of Veterans Affairs (VA) guarantees homebuyer loans for qualified military service members, veterans, and their spouses. Borrowers can finance 100% of the loan amount with no required down payment.

  • Credit Requirement: No established minimum, but typically, credit scores need to be in the 600s with a debt-to-income ratio of no more than 41%
  • Other Benefits include a lower closing cost, better interest rates, and no private mortgage insurance payments

USDA Loans

The U.S. Department of Agriculture (USDA) guarantees loans available for buyers who plan to buy in rural or small suburban areas and are often subject to property value caps and income caps.

  • Down Payment Requirement: Typically requires little to no money down for qualified borrowers as long as the property meets the USDA’s eligibility requirements
  • Credit Requirement: Minimum score of 640 to qualify; must have an established, positive borrowing history or meet alternative criteria
  • Additional Considerations: Monthly payment for USDA loans must be no more than 29% of the buyer's income

Fixed Rate vs. Adjustable Rate Mortgage

Explore the key differences between fixed-rate and adjustable-rate mortgages to determine which option aligns best with your long-term goals.

Fixed-Rate Mortgages

A fixed-rate mortgage loan has an interest rate set for the entire loan term, which allows the buyer to have a predictable monthly payment for the life of the loan. This type of term is best for those planning to stay in their home for long periods.

Additional Details

  • Stable Payments: Interest rate remains the same, ensuring predictable monthly payments
  • Refinancing Option: If interest rates drop, refinancing could lower payments
  • Term Varieties: Varying term lengths, with 30 years being the most common - 15 and 10-year options are also potentially available

Adjustable Rate Mortgages (ARM)

An adjustable-rate mortgage, often called an ARM, begins with an initial fixed rate for a pre-determined period. Once this period ends, the rate will automatically adjust with market rates.

Additional Details

  • Initial Fixed Period: Starts with a fixed rate, then adjusts to market rates
  • Rate Fluctuation: Payments may increase or decrease based on interest rate changes
  • Common Terms: Typically a 30-year term, with the initial rate stable for five years, then adjusting annually

If you're considering an Adjustable Rate Mortgage (ARM), a commonly used ARM is a 5/1 ARM. The "5" indicates the initial term, which means the interest rate remains fixed for the first five years. The "1" shows that the interest rate will adjust once every year starting from year six.

ARM rates fluctuate and are structured with three caps: initial, periodic, and lifetime. For example, a 5/2/5 cap structure means three caps on the interest rate. These numbers mean:

  • Initial Cap (5): Maximum points above the initial interest rate that your rate can increase in the first year
  • Periodic Cap (2): Maximum points your rate can increase in subsequent years after the first year
  • Lifetime Cap (5): Maximum amount your interest rate can increase over the life of the loan

FSB's Mortgage Lenders can help navigate ARMs to find a comfortable term and structure despite their complexity.

Connect with a Mortgage Lender

When it comes time to decide on your mortgage options, be sure to take the time to talk with a qualified lender. Mortgage lenders are the best resource for providing expert advice, examining your financial situation, and determining what loan type and term will most closely align with your financial situation and future goals!

Connect with a Mortgage Lender

Meet Tammy Yamilkoski

Tammy Yamilkoski - Photo

Tammy, with over 25 years of experience in mortgage lending, has assisted thousands in achieving their American Dream. As Vice President and Mortgage Originator at the Hiawatha Branch, she's known for building lasting client relationships.

Tammy is dedicated to going the extra mile, leveraging her extensive knowledge of loan programs to secure the best options for her clients, ensuring a stress-free, on-time closing. Reach out to Tammy for expert advice today!

Call 319-730-6992
Email TammyYamilkoski@fsbmail.net
This email is not secure, please do not include sensitive financial information.

Sources: 
myhome.freddiemac.com/blog/homebuying/considering-adjustable-rate-mortgage-heres-what-you-should-know

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