When you’re in the market for a mortgage, it certainly pays to do your research. You may already have the basics down, but it’s always a good idea to get a refresher course and review all available options. Here’s a rundown that covers some of the ABCs.
Fixed or Adjustable?
The terms of this decision are pretty straightforward, but require careful consideration. A fixed rate mortgage is exactly what it sounds like: one with an interest rate that remains the same for the life of the loan. An adjustable-rate mortgage (ARM), on the other hand, changes at certain points along the way.
Typical set-ups include 5/1 and 3/1, in which the rate stays the same for five or three years and then thereafter, changes each subsequent year. In deciding whether fixed or adjustable is right for you, what it really comes down to is asking yourself – how long do I plan to live in this home? If the answer is many years, then fixed rate probably makes more sense. If you expect a shorter stay, then the parameters of an adjustable rate may work to your advantage.
Conventional or Government-Insured?
A conventional loan is not insured or guaranteed by a government entity, whereas a government-insured loan, as indicated by the name, is. So why would a home buyer choose one over the other? The answer to this one is a bit more complex because there are several issues to weigh. The feasible size of your down payment is often a deciding factor in this case. With a government-backed loan such as an FHA – through the Federal Housing Administration – a smaller down payment is required, which is appealing particularly to first-time home buyers. The down side? You’ll need to purchase mortgage insurance since the government is insuring the lender against losses that may result from your default on the agreement.
If you are able to put down 20% or more, then conventional may be the way to go since mortgage insurance can be avoided altogether. Less than that 20% and you’ll still need to make mortgage insurance payments, but this time directly to a private company rather than the government.
Conforming or Jumbo?
This label simply has to do with the size of the loan. If the underwriting guidelines of Fannie Mae and Freddie Mac are met – meaning the loan conforms to these government-backed corporations’ criteria – then it is considered a conforming loan. A jumbo loan, on the contrary, exceeds these loan limits, resulting in a higher risk for the lender and generally, higher interest rates for the borrower.
These designations are the more common aspects to the makeup of a mortgage and represent a general overview of the various choices you have. Educating yourself is vital to making the right decisions for you and your individual situation.