Which Type of Mortgage Is Right for You?

7 Types of Mortgages: Best Homebuying Loans

If you’re thinking about buying a house soon and don’t have the cash to pay for it outright, figuring out where to start with a mortgage can be daunting.

Navigating the world of mortgage lending can be overwhelming. Your home is likely to be the largest purchase you’ll ever make, and your mortgage will be the biggest amount you’ll ever need to finance. It’s essential to do your research ahead of time.

Where should you begin? There are numerous questions to consider: How can I get the best interest rate? Will I need to pay PMI? What if I don’t have a large down payment? What type of mortgage is best for me?

As with any significant purchase, it’s best to educate yourself about your mortgage options before you start house shopping. Having a basic understanding of the various mortgage options before meeting with a loan officer will make the process smoother and less overwhelming.

Our friends at First Mortgage Manchester provided some tips, so consider this your crash course in mortgage lending. Let’s start with the basics.

4 Types of Mortgages You Need to Know About

There are many types of mortgages, but the most common are divided into two categories: conventional and government loans.

  • Conventional Mortgages: These include basic conforming loans.
  • Government Loans: These are insured by the government and include FHA, VA, and USDA/RD loans.

Each of these options has its advantages, but the best one for you depends on your financial situation, credit score, down payment amount, and whether you’ll need mortgage insurance.

Conventional Mortgage Loan

Conventional mortgage loans are a great option if you can qualify. You can put as little as 3% down, but to avoid paying private mortgage insurance (PMI), you’ll need at least a 20% down payment. Conventional loans typically offer low-interest rates because borrowers must have higher credit scores, which reduces the lender’s risk. If you need to pay PMI, the amount is generally low.

Veteran’s Administration (VA) Loan

VA mortgages are available to veterans and their spouses. If you qualify, a VA loan is an excellent option, especially if you don’t have perfect credit. You can finance 100% of the home’s purchase price, eliminating the need for a down payment. VA loans include an upfront funding fee, but there’s no monthly mortgage insurance, making them attractive to many borrowers.

USDA/Rural Development (RD) Loan

If you’re not a veteran and lack a down payment, consider a USDA or RD loan. These loans have property restrictions and are available for homes in specific rural areas. They also have income limits. Like VA loans, you can finance 100% of the purchase price, and there’s an upfront guarantee fee and low monthly mortgage insurance.

Federal Housing Administration (FHA) Loan

FHA loans are ideal for borrowers with lower credit scores or smaller down payments. You can put down as little as 3.5%, but the monthly mortgage insurance is high and lasts for the entire loan term. FHA loans also include an upfront mortgage insurance fee, which can be financed into the loan.

Fixed Rate vs. Adjustable Rate Mortgages

Once you’ve decided on the type of loan, you’ll need to choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM).

Adjustable Rate Mortgages (ARMs)

ARMs start with a low-interest rate that adjusts over time. While they can offer lower initial payments, they come with the risk of higher payments in the future. ARMs are best for borrowers who don’t plan to stay in their home for long.

Fixed Rate Mortgages

Fixed-rate mortgages are the most common and stable option. The interest rate remains the same throughout the loan term, providing predictable monthly payments. This stability makes budgeting easier and protects against market fluctuations.

What’s the Best Mortgage Loan for You?

If you have excellent credit and at least a 3% down payment, a conventional mortgage is typically the best option due to its low rates and affordable PMI. If your credit isn’t stellar or you lack a sizable down payment, see if you qualify for a VA or USDA loan. If those aren’t options, consider an FHA loan as a last resort.

If none of these options work for you, you may need to wait while you improve your credit or save for a down payment. In rare cases, you might negotiate a lease-purchase option with the seller, allowing you to rent the property for a year or two before buying it. This option can help you hold onto the house while improving your financial situation.

Next Steps

Once you determine which loan is best for you, schedule an appointment with a loan officer to get prequalified. Having done your research, you’ll impress your loan officer and streamline the process. After getting prequalified, you can start looking for a realtor and begin the exciting journey of finding your new home.

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