Mortgage Type Activity

Which Mortgage is Right for You?

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No bells, whistles, or fine print here. A conventional mortgage is a standard loan that isn’t backed by the Federal Housing Administration (FHA). It’s the most straightforward type of loan that gives you the money you need to buy a house, which is paid back over the life of the loan, usually during 15, 20, or 30 years.

Conventional loans usually require you to purchase private mortgage insurance. It’s basically an insurance policy that covers your lender in case you can’t pay the money back. That can increase the overall cost of your loan, but conventional loans usually require less borrowing and lower closing costs than other types—even if the interest rate is slightly higher.

PROS:

Simple, straightforward terms
Lower closing costs
Rewards good credit with good rates

CONS:

Interest rate may be higher than that of other loans
Requires higher down payment than other loans
Requires private mortgage insurance

BEST FOR:

Conventional loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.

If you’re the type of person who values stability, you’ll probably want a fixed-rate mortgage. It ensures that your mortgage payments will remain the same throughout the life of the loan, no matter how market conditions change. You’ll essentially “lock in” whatever interest rate your lender offers when you sign on your loan, and you’ll keep that interest rate until your loan is paid in full. If interest rates fall drastically, you may even be able to refinance your mortgage at a lower rate (as long as you’re willing to pay loan costs again).

While you might end up paying a higher interest rate overall, a fixed-rate mortgage gives you the peace of mind that you’ll always know what you owe each month. Most fixed-rate loans last for 15, 20, or 30 years, and they are a low-risk way to build equity and credit over time.

PROS:

Stable rate and consistent payment for the life of the loan
Won’t increase if interest rates rise
Easy to refinance if you want a lower rate

CONS:

May be a higher rate than an adjustable-rate loan (which could mean paying more in interest over the life of the loan)
May need to pay closing costs if you decide to refinance to get a lower rate

BEST FOR:

Borrowers who want a stable mortgage payment that remains the same, no matter what.

Interest rates pretty much change daily, and if you’re willing to assume some of the gamble, an adjustable-rate mortgage could result in lower interest costs. It’s a mortgage that is subject to market conditions and the interest rates set by the Federal Reserve. If interest rates fall, you’ll owe less each month. If interest rates rise, so does your monthly payment.

Most lenders “lock in” your low interest rate for one, three, seven, or even ten years, after which you’ll be subject to market fluctuations. Some lenders even allow you to “cap” how high interest rates affect your payment. Still, you’re left at the mercy of the Federal Reserve and your payment could become unaffordable if rates skyrocket.

PROS:

Can give you a super-low interest rate to start
May be able to lock in your low rate for a specified amount of time before it begins to adjust
May have more flexible requirements than other traditional loans

CONS:

Hard to refinance
Rates could increase, resulting in an unaffordable payment
High rates could leave you owing more than your home is worth

BEST FOR:
Borrowers who don’t qualify for more traditional loans and who are willing to assume the risk of a fluctuating payment, or homeowners who don’t plan on living in their home for more than a couple of years.

If you need a mortgage but your credit score isn’t high enough to qualify for a conventional loan, you might be able to get a government-insured loan. It’s basically where the FHA promises to pay back your lender if you default, which reduces some of the risks to your bank. In exchange, they loosen some of the credit requirements so individuals with lower scores can qualify. It’s also a good option if you have less cash on hand for a down payment, since you can qualify with as little as 3.5 percent down.

Government-insured mortgages require a lot of documentation to prove that you can and will pay back the loan. They often have higher costs when compared to traditional loans because you’ll have a mandatory insurance premium included (which you’ll pay annually).

The government also offers specialty loans for veterans (VA loans) or those living in low-income areas (USDA loans), but you’ll have to meet special requirements to qualify.

PROS:

Can qualify with a lower credit score
Allows for a lower down payment
Can help borrowers qualify for homeownership even if they don’t qualify for a conventional loan.

CONS:

Requires you to purchase mandatory mortgage insurance
Can have higher closing costs
Requires proof of a steady job and income

BEST FOR:

Borrowers with smaller down payments, lower-income borrowers, or individuals with lower credit scores with money saved for a down payment.

Thinking of spending a pretty penny on an expensive home? You might need a “jumbo” mortgage. It’s what lenders call a mortgage above the government’s “conforming mortgage limits,” or the amount the FHA has determined that traditional loans cannot exceed. Because home values vary across the United States, the maximum limit depends heavily on where you live. While the 2021 conforming loan limit (CLL) is around $647,200, it could be much higher in areas with a high cost of living.

If you need a jumbo loan, you’ll have to prove that you assume most of the risk and are a safe bet for your lender, since your jumbo loan won’t be insured by traditional policies. Your bank will require extensive documentation to prove that you have enough savings in the bank and a steady income. You’ll also need a high credit score of above 700 to get the most competitive rates and a down payment between 10 and 20 percent at least.

PROS: