Buying a home is an investment; one that provides more than just greater financial stability. Buying a home gives you freedom you wouldn't necessarily have. When it comes to buying though the most frequently asked question is what type of mortgage should I get? Here we will look at the most common ones so you can make an informed decision!
Fixed Rate Mortgage
- These mortgages can come in 15-year or 30-year terms.
- With this loan, your interest rate and monthly payment stay consistent for the length of the loan.
- This type of loan is popular when mortgage rates are low because borrowers can lock in a low interest rate.
- The shorter the term period the higher the monthly payment.
- As of February 2023, a 30-year fixed rate has an average interest rate of 7.02%, respectively a 15-year fixed rate is averaging at 6.3%.
Adjustable Rate Mortgage
- You’ll make fixed payments during an initial fixed-rate period, and then the interest rate will adjust based on the market.
- Typically, people will choose an ARM when interest rates are higher because they offer a lower interest rate initially and then the rate will adjust based on the market.
- Most ARMs also come with rate caps that limit how much your rate can vary during the adjustable period. This period could last anywhere from 6 months to 10 years.
- The most common type of adjustable rate is a 5/1 ARM.
- Features a fixed rate for the first 5 years as ARMs come with unpredictable monthly payments.
- Current average rate is 5.71%.
- This type of mortgage is best for homebuyers who expect to move or refinance before the adjustable period has ended.
FHA Mortgage
- Federal Housing Administration insures the mortgage.
- Easier to qualify for with a lower credit score and the ability to put a down payment as low as 3.5%.
- Perfect for those buyers who don't qualify for a conventional loan.
- Downsides:
- Mortgage insurance premiums are required for homebuyers who put less than 20% down.
- You can't cancel FHA mortgage insurance once you're reached 20% equity in your home.
VA Mortgage
- Backed by the Department of Veteran Affairs.
- VA loans are only available to eligible service members (having served for at least 90 consecutive days without a break in service), veterans, and their spouses.
- In most cases, there is down payment required, no prepayment penalty, and no mortgage insurance.
- Borrowers usually get access to better rates and fewer closing costs. On the flip side, VA loans require a funding fee. This fee keeps loan costs low for taxpayers. Fee ranging from 1.4% - 3.6% of the loan amount depending on down payment and if you've taken out a VA-backed purchase loan before.
USDA Mortgage
- Issued or insured by the U.S. Department of Agriculture.
- Only available to borrowers seeking a home loan for a property in an eligible rural area.
- There are household income limits that vary on the type of USDA mortgage.
- You can put as little as $0 down, but a guarantee fee is required for the entirety of the loan.
- For 2023, the fee is 0.65% of the loan amount upfront and 0.35% of the loan amount annually.
Jumbo Mortgage
- A home loan for an amount greater than the conforming loan limit, which varies by location.
- For 2023, the conforming loan is $726,200, but you can borrow more in high-cost areas.
- If you are looking to buy a home that exceeds the conforming loan limit in your area, you'll need a jumbo mortgage.
- Pros:
- Available in fixed and adjustable-rate options.
- Cons:
- They are more difficult to qualify for than conforming loans.
- Typically require 10% down with strict credit score requirements.
