Choosing the Right Type of Mortgage
Let’s say you and your neighbor are both in the market for a mortgage. Would you both go to the same lender and apply for the same loan? Probably not. Not only do people have different requirements for a mortgage (a long-term loan for a house), but they also have diverse reasons and bring a variety of qualifications and circumstances to the table when seeking one.
So, how do you go about choosing the right type of mortgage for your particular needs? Start by asking yourself a few important questions...
What Kind of Loan do You Want?
Mortgages don’t come in a one-size-fits-all package because each lender and situation is unique. Here are the main types of loans and who may benefit the most from each:
Conventional | The most popular option for American borrowers is conventional financing. These loans are provided through banks and private lenders, meaning there may be more flexibility than those guaranteed by the federal government. Most of them are conforming loans, which refers to the amount you can borrow in most U.S. geographic locations. Non-conforming are also known as jumbo loans.
A good choice for borrowers who: Wish to put down 3%-20% on a home. Boast a credit score in the mid or upper range of FICO. Can show a regular income and stable employment or business ownership. Are seeking to eliminate private mortgage insurance fees (PMI). May want to finance a second home, condo or other alternative property.
FHA Financing | Offered and insured by the Federal Housing Administration, these loans are often ideal for first-time buyers, but are not restricted to your first home purchase.
A good choice for borrowers who: May have less than stellar credit and a lower percentage of a down payment than the once-standard 20%. Want to take advantage of lower interest rates. Don’t necessarily qualify for a conventional mortgage. Are financing a single-family, owner-occupied residence.
VA Loans | The Veterans Administration offers the valuable benefit of easier financing for all veterans and active military personnel.
A good choice for qualified borrowers who: Wish to finance with as little as zero down payment and competitive interest rates. May have credit struggles. Don’t want to pay additional PMI.
Refinance | Just as the term suggests, you’re “re-borrowing” your current mortgage and rolling it into an improved situation. This process can also be achieved through any of the previous three methods mentioned – conventional, FHA or VA – depending on individual objectives and qualifications.
A good choice for borrowers who: Want to take advantage of lower interest rates, thereby reducing their monthly payment. Also want to leverage lower rates to reduce their mortgage term, such as refinancing from a 30-year loan into a 15- or 20-year loan. May have adequate equity in their home and wish to take up to 80% of that value in a cash-out refinance – whether for home improvement, education or other financial needs.
Choosing the Term of Your Loan
Whether seeking a new purchase mortgage or refinancing an existing one, you’ll want to consider the best term and rate for your loan. While the most common is a 30-year fixed rate loan, there may be advantages to consider for a reduced term or adjustable rates.
If your budget allows for higher monthly payments, reducing your term to 10, 15 or 20 years can save thousands of dollars in interest over the life of your loan, as well as drastically cutting your repayment time.
Fixed rate loans by definition don’t change – unless you refinance when interest rates go down. This maintains your monthly payment for the life of the loan, and is ideal when you plan on staying put. An adjustable rate mortgage can be a good choice for borrowers who wish to take advantage of low rates for a shorter period of time, but plan to either relocate or refinance within a few years.
How to Find the Best Mortgage Lender
Just as you and your neighbor would have different mortgage needs and qualifying factors, you will probably both seek out and choose different mortgage lenders. Direct lenders include banks, credit unions and organizations like EnTrust Funding (ETF) who provide a wide range of loan products and programs, as well as competitive rates. With a little homework and preapproval, you can determine who can offer the best mortgage or refinancing solution. Just as importantly, we at ETF appreciate the value of relationship and connection during this process.
We understand that a mortgage is not just a transaction but rather it is a path to your American Dream. Stay safe and healthy.