How to Pick a Mortgage
By Eddie V. —
Published March 06, 2018
If you are looking to buy a house, you, in all likelihood, need to get a mortgage first. Finding a good deal on a mortgage can be almost as much of a challenge as finding the perfect house. With a few guidelines in place, however, finding a mortgage that is right for you can be a less daunting process. What you need to remember when picking a mortgage1. Credit score: To be able to get a good rate on your mortgage, you need to have a good credit score. Before you apply for a loan, make sure to check your credit and find ways to improve your score if necessary.
2. Affordability: Don’t forget that you will be paying back the loan for at least the next ten to twenty years. Make sure that the amount you borrow is within your ability to pay back.
3. Types of mortgage: There are two main types of mortgages which are conventional and government-backed. A conventional mortgage is given to you by a private bank or similar lending agency. You need to have a good credit score and might need to put down about 5% of the total house price as down payment. There are three types of government-backed mortgages; FHA loans, VA loans and USDA loans.
- FHA loans: FHA loans are insured by the Federal Housing Administration. These loans are offered to make housing affordable, especially for first-time home buyers. Because they are backed by the government, someone with a lower credit score can also apply for an FHA loan. The buyer will need to put down 3.5% of the total for the down payment.
- VA loans: Loans backed by Veteran Affairs are only available to those currently serving in the military or veterans. These loans can even go up to 100% of the price of the house.
- USDA loans: For those looking to buy property in rural areas, there is the option of loans backed by the United States Department of Agriculture. There are certain requirements that the applicant has to meet to qualify for this type of loan.
1. Type of interest rates: The fixed type of interest rate means that you pay the same amount for the entire duration of the life of the mortgage. If you are looking to settle down and going to be living in the house you buy for a long time, then a fixed interest rate might be the best option for you. With a fixed interest rate, you always know how much you will need to spend in interest payments every month. With adjustable interest rates, the rate remains fixed for the first five years or so, but then they start to fluctuate. The rate usually increases after the fixed period and continues to increase at regular intervals. The main advantage of an adjustable interest rate is that the initial payments are usually much lower than that of a fixed interest. People who think they might sell or refinance after a few years of buying their house might want to opt for an adjustable interest rate.
2. Size of the loan: If the size of the loan is conforming, then there is a limit on the amount you can borrow. This limit has been fixed by the government-associated companies, Fannie Mae and Freddie Mac. Conforming home loans are usually lower risk and require a smaller percentage of the down payment on the price of the house. If you are looking to borrow a much larger sum of money, then you need to look at a non-conforming loan. There is no limit set on the amount that can be borrowed from a non-conforming loan but you will need to pay at least 20% of the price of the house for the down payment. You will also need to have an exceptionally good credit score to qualify for a non-conforming home loan.Now that you have a better idea of the types of mortgages that are available and the requirements for each, you can better decide which one to choose.