When shopping for a new home, most buyers know exactly what they’re looking for and can tell pretty quickly if a particular home is right for them. But shopping for a mortgage is a bit trickier. There are many options out there, and unfortunately, no one-size-fits-all solution.

To help you feel a bit more confident going into the loan selection process, here’s a super-simple breakdown of the products you’ll likely hear about.

Fixed-Rate and Adjustable-Rate Loans
According to the Mortgage Bankers Association, more than 93 percent of mortgage applications are for fixed-rate loans. However, an adjustable-rate mortgage, or ARM, can be a powerful tool for borrowers with specific goals in mind.

With an ARM, the interest rate varies throughout the life of the loan. Typically, the initial interest rate is lower than that of a fixed-rate mortgage, and that rate is locked in for a certain period of time – 3, 5, 7, or 10 years. After that, the interest rate adjusts annually. Most ARMs include an interest rate cap that sets a limit on how high the rate can go.
On the other hand, a fixed-rate product comes with a locked interest rate that does not change during the term of the loan.

The Consumer Financial Protection Bureau says because your monthly payments are more likely to be stable with a fixed-rate loan, “you might prefer this option if you value certainty about your loan costs over the long term.” The Bureau adds that while ARMs offer less predictability, they may be cheaper in the short term and can be a good option if “you plan to move again within the initial fixed period of the ARM.”

Conventional or Government-Backed Mortgages
Not only will you need to decide on a fixed or adjustable interest rate, but you’ll also have to decide between a government-insured loan or a conventional option.
Patty Leonard, senior residential loan officer with Independent Bank, says it’s really important for consumers to understand the ins and outs of these options.

“You’ve got conventional products and then the three government-backed options – FHA, VA, and Rural Development,” she said. “Then, there are offshoots of each of these loan types and they all come with different eligibility requirements, so it’s critical that you work with a lender who can walk you through it all.”

A conventional loan is a mortgage that is not backed or insured by a government entity but is instead available through or guaranteed by a private lender or the two government-sponsored enterprises, Fannie Mae and Freddie Mac.

Conventional loans offer some of the most competitive interest rates, and they usually require less documentation. However, they also often have a higher bar for approval.

Government-backed mortgages are loans subsidized by the government, like those offered by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the U.S. Department of Agricultural (USDA) Rural Development. These loans are popular because they offer borrowers with less-than-desirable credit the chance to get into a home for little-to-no money down.

PMI or MIP
If you’re one of the many borrowers putting less than 20 percent down on your new home, you’ll need to understand how mortgage insurance works, especially because this extra cost may be a factor in deciding which loan you choose.

With less than 20 percent down on a conventional loan, your lender will require you to purchase private mortgage insurance (PMI), which serves as protection should the borrower default on the mortgage. Typical PMI rates run about 0.5 to 1 percent of the loan balance per year, but it could be a bit higher or lower depending on each borrower’s financial situation.

Typically, borrowers pay PMI in a monthly premium, and it falls off automatically once a borrower reaches 22 percent equity, or 78 percent loan-to-value.

On the other hand, some government-backed loans charge what they call a mortgage insurance premium, or MIP. This type of insurance premium is generally used with FHA and USDA loans and just like PMI, it serves as protection for the lender.

“MIP is calculated a bit differently,” said Leonard. “There is an upfront fee as well as a monthly premium, and the rate is based on loan amount only. FHA borrowers pay 1.75 percent of loan amount up front and .85 percent monthly. On USDA loans, 1 percent is paid up front and .35 percent is paid monthly.”

A big difference between PMI and MIP is how long a borrower must pay the premium. For instance, for any FHA any loans acquired after June 2013, with a loan-to-value greater than 90 percent, MIP remains in effect throughout the life of the loan.

Talk to the Experts
While knowing the basics is important, there is much more to obtaining a mortgage. Leonard says before borrowers start looking over loan options, they need to have a firm grasp on their financial situation, and they need to select a trusted, local lender to help guide them.

“Things like down payment, credit score, debt-to-income-ratio…all of these factors, along with your short- and long-term goals, will help determine which mortgage is right for you,” she said. “And it’s all situational. I’ve had clients come in thinking they want one type of loan, but after we talked, it was clear that another option worked much better.”

If you’re new to the world of home loans and want some expert guidance, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com for a list of reputable, professional lenders who will help ensure you’re set up for success.