Choosing the Right Mortgage for Your Needs
While the joys of finding your dream property may seem like all fun and no work, the financials make you realize how much thought needs to be put into choosing the right mortgage. Of course, there is an obvious goal to doing so: getting the home of your dreams at an affordable cost. In this article, we’ll walk you through some basics to help you work out which mortgage is best for you.
What a Mortgage Means
Your mortgage payment is composed of two parts: principal and interest. The principal is the amount of money you’ve borrowed. The interest is an extra charge—as a percentage of the principal—to cover the lender’s costs. If you have a fixed-rate loan, your monthly payments are based on an amortization schedule that’s set by your lender.
Types of Mortgage
Conventional Mortgage
A conventional loan is not supported by the federal government. If you have good credit, a steady job, and a 3% down payment, you may be eligible for a conventional loan through Fannie Mae or Freddie Mac. These two companies buy and sell conventional mortgages in the United States.
Conforming Mortgage Loans
Conforming loans have maximum loan limits that are determined by geographic location and adjusted for inflation. The Federal Housing Finance Agency (FHFA) sets higher limits in certain high-cost areas.
Non-conforming Mortgage Loans
Non-conforming loans are typically ineligible for sale or purchase by Fannie Mae or Freddie Mac because of the loan amount or underwriting guidelines. A popular type of non-conforming loan is the jumbo loan, which has an amount greater than conforming loan limits.
Federal Housing Administration (FHA) Loans
If you are in the low- to moderate-income bracket and you want to purchase a house for the first time, you may be able to do so with a loan insured by the Federal Housing Administration (FHA). Borrowers don’t need to put down a large down payment.
Veterans Affairs (VA) Loans
The Department of Veterans Affairs offers home loans to qualified military service members, veterans, and their spouses. With a VA loan, you can purchase a house with zero down payment and few closing costs. You’ll also get better interest rates and may not need mortgage insurance or private mortgage insurance. However, they do require a funding fee as part of the cost to taxpayers. The more money you borrow, the greater your fee will be.