The Right Mortgage Sets You Up For Long-Term Success
Signing any type of contract can be unnerving but securing a mortgage contract can be especially daunting. With so many options available to borrowers, it can be difficult to know just where to start when looking for the right mortgage for your financial situation, short-, and long-term goals.
If you're ready to delve into the mortgage world and become a homeowner, here are three common mortgage types for first-time buyers to help get your mortgage journey started.
Note: many people confuse mortgage type with mortgage term, or the length of time a homeowner has to pay back their loan. Here, we'll discuss types, not terms.
Convention mortgages are very popular among first-time buyers, thanks to the number of perks they offer. This type of loan follows guidelines that have been set forth by Fannie Mae and Freddie Mac, which are two agencies that help standardize how we in the U.S. lend money for mortgages.
Conventional loans are popular because they allow for the purchase of a wide range of property types. You can purchase a condo, a home, a second home, or in some cases, may even be able to purchase a manufactured house with a conventional loan.
Conventional Mortgage Pros
- Speedy processing times
- No private mortgage insurance needed if the down payment is at least 20 percent
- Competitive interest rates
- The ability to purchase a home without needing a 20 percent down payment
If you've built and maintained your credit score over the years and have a steady stream of income, a conventional mortgage may be worth looking into more!
Mortgages offer a lot of room for customization, all so you can choose the setup that suits your goals. Let's go over two popular conventional mortgage types, starting with a fixed-rate mortgage.
In a fixed-rate mortgage, the interest rate is set for the life of the loan.
Why is this a popular option, especially among first-time buyers? Because it helps determine what your monthly installments will be over the life of the loan. That's very important, especially as a new homeowner, because other expenses can and will pop up, like the need to replace appliances and general upkeep of the home. With a fixed-rate mortgage, you'll know how much you'll need every month to stay on top of payments.
This type of loan also offers a level of protection. Should rates rise, you will have locked in your lower rate and your contract won't be affected by what's currently happening in the market. Because of that protection, however, it's important to note that many fixed-rate mortgages come with slightly higher interest rates than the next type we'll discuss.
With an adjustable-rate mortgage, the interest rate adjusts according to the terms of the contract. That means that the starting interest rate - which is typically low - is set for a number of years. After that time is up, the interest rate then adjusts.
While there are stipulations to exactly how much that rate can adjust, should it go up, that will increase your monthly installments. Because this type can be a gamble, it's popular among those who don't plan on staying in that particular home for a significant amount of time, or for those who know they'll want to refinance before their initial term ends.
This type of loan is insured by the Federal Housing Administration, thus its name. An FHA loan is popular among those who haven't saved a considerable amount for a down payment or who have a credit score that may have taken a few hits over the years.
FHA Loan Pros
- Low down payment options
- Low credit score requirements
- Typically lower closing costs than a conventional loan
On average, it's typically easier for a borrower to qualify for an FHA loan than a conventional one, especially if there are a few financial mishaps present on a credit report. Because of that, FHA loans are popular among buyers who have a moderate income or a high debt-to-income ratio.
If you are an active or retired member of the U.S. military, you may be eligible for a loan backed by the U.S. Department of Veteran Affairs.
Open to eligible veterans and in some cases, a surviving spouse, it's a great benefit reserved exclusively for those who have served our country.
VA Loan Pros
- Flexible terms
- Generally easy to qualify for
- Low closing costs
- No down payment needed
- No monthly mortgage insurance requirement
Because of these impressive perks, if you're an active or retired U.S. military member, it's worth seeing if you're currently eligible.
Change Your Mind? No Problem
What if the mortgage you thought was a great option for you turns out to not be so great a few years later?
Thankfully, you're not locked into your contract until you repay it. You can always refinance when the time is right!
When you refinance, you replace your current mortgage with a new one. There are numerous reasons why people choose to refinance, including to secure a lower interest rate or, say, to move from an adjustable-rate mortgage to a fixed one. The key to securing the most competitive offers? Comparing lenders, which you can easily do with help from Lendgo.
See What Rates You Qualify For!
Is this an exhaustive list of all available possibilities? Absolutely not. Many different mortgage options exist, all of which are designed to help buyers of all needs, financial situations, and backgrounds secure a home of their own. This list simply introduces you to a few of the most popular options so that you can gain a better understanding of what's out there.
Your lender will be able to discuss the specific options that complement your situation.
For that reason, it's important to choose your lender wisely. After all, they hold your financial future in their hands. Borrowers who compare lenders typically go on to secure lower interest rates, so don't take the first offer that comes along! Easily compare lenders via Lendgo, a completely free platform that connects prospective buyers with reputable lenders.