What Mortgage is Right for Me?
When it comes to mortgages, there is no one-size-fits-all approach. In fact, the options can be overwhelming, especially for those new to the home buying process. To help get you started on your quest to find the perfect home loan, let’s explore some of the options you’ll hear about and help answer the question, “Which mortgage is right for me?”
Fixed-Rate or Adjustable-Rate Loans
With an adjustable-rate mortgage (ARM), your 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. After that, the interest rate adjusts annually. Most ARMs include a rate cap that sets a limit on how high the interest rate can go.
Fixed-rate mortgages come with a locked interest rate that doesn’t change during the term. 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.”
“Because of where interest rates are right now, we’re predominantly writing fixed-rate mortgages,” said Ron Eible, branch manager with CrossCountry Mortgage, Inc. “There may be specific situations in which an ARM will work better, but in general, when interest rates are low, the fixed-rate mortgage is king.”
Conventional or Government-Backed Mortgages
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). 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.
The FHA offers loans with down payments as low as 3.5 percent, and the USDA’s Rural Development loan provides a couple of different plans — the Guaranteed Loan and the Direct Loan — neither of which requires a down payment. The VA program enables qualified buyers to purchase a home with virtually no money down and they can actually do this without the penalty of private mortgage insurance.
A conventional loan is a mortgage that is not backed or insured by a government entity but is instead guaranteed by a private lender or one of the two government-sponsored enterprises, Fannie Mae and Freddie Mac.
Conventional loans come in a variety of sizes and terms, offer some of the most competitive interest rates, and usually require less documentation. However, they also tend to have a higher bar for approval. While it’s assumed that conventional loans require a large down payment, the rules have eased up over the years and there are actually several programs that require as little as 3 percent down. Some banks and mortgage companies may offer niche products with an even lower down payment.
“When shopping for your mortgage, make sure the lenders you speak with offer a full range of products,” said Eible. “Most lenders do, but it’s important to ask because you want to have access to all the available options, including potential state and local down payment assistance programs, if needed.”
15- vs. 30-Year Mortgage
According to Freddie Mac, in 2017, 90 percent of homebuyers chose the 30-year, fixed-rate mortgage. It’s the path that’s been taken by borrowers for generations and, over the years, it’s pretty much become the industry standard. However, the 15-year mortgage does have some advantages for homeowners who can swing it.
The loans are structured similarly—the main difference is the term. A 15-year mortgage allows you to build equity faster and it tends to be much cheaper in the long run because you’ll pay less interest. In fact, over the full life of a loan, a 30-year mortgage will cost more than double the 15-year option.
However, a shorter-term loan means a higher monthly payment, and even if the numbers seem doable now, a lot can happen in 15-30 years. The longer term gives consumers the flexibility to make larger payments when they have extra cash, but then fall back on that 30-year payment when needed. And, since payments on a 30-year loan are less than on a 15-year, your debt-to-income ratio will be lower. This means you may qualify for a larger loan, which can open up more options during the home search.
Keep in mind, this is just an overview of the loan options you’ll hear about, and while it’s important to do your own research, the only way to truly know what mortgage type will work best for you is to meet with a professional, local lender.
Eible says consulting the experts is critical, no matter if you’re a first-time homebuyer or a seasoned homeowner.
“This mortgage industry is constantly evolving, so a product that worked well before, may not be right for you today,” he said. “And, a loan that worked for a family member or coworker might not be the right fit for you. Everyone’s financial picture is different, so you need to find a local lender who will analyze your individual financial profile and help select the right mortgage for you.”
And, for hopeful buyers who worry they won’t qualify for the products we discussed, Eible says a face-to-face consultation with a lender can help get you on the right path.
“Future planning is key to a successful home buying experience,” he said. “We have customers we’ve worked with for 3-9 months or even longer, helping them improve their overall financial picture so they can be in a good position when they’re finally ready to buy.”
If you need help selecting a mortgage that fits your needs, or even if you’re just planning for a future purchase, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com for a list of experienced, area mortgage lenders who are happy to help guide you.