Choosing the Right Mortgage
Finding the right mortgage to suit your needs and budget is just as important as finding the right home. Your lender and real estate agent are two great sources of information. Both should be able to help you review the pros and cons of different mortgage types.
To help you choose the right mortgage, ask yourself these questions:
- How long do you plan to stay in your new home?
- Are you comfortable with fluctuating interest and mortgage payments, or do you prefer to pay the same amount each month?
- Are you able to make a down payment? If so, how much?
- Would you like to avoid paying private mortgage insurance (PMI)?
- Are you a servicemember, veteran or an unmarried surviving spouse who might be eligible for a VA loan?
Even if you already have a mortgage or are familiar with the different types, it’s smart to review your options and determine which mortgage works best for you. Here is a look at four popular mortgage options:
- Fixed-rate mortgage
- Adjustable-rate mortgage (ARM)
- 100% financing*
- VA loan
*Product features subject to approval. 100% financing loans include an additional funding fee, which may be financed up to the maximum loan amount. Available for purchase loans only.
Fixed-rate mortgages have the same interest rate (and payments) for the length of the loan. Most of these mortgages are paid off over the course of 15 to 30 years. (Some lenders offer 40-year mortgages.) Because you have less time to pay off a 15-year loan, your monthly payments will be higher. The more expensive the house, the higher the payments. However, you’ll pay less in interest over the length of the loan. When choosing between a 15- or 30-year fixed-rate mortgage, the key deciding factor should be how much you can comfortably afford to pay each month.
Variable-interest rate loans, often called adjustable-rate mortgages or ARMs, feature an interest rate that increases or decreases, depending on fluctuations in the market. As a result, your mortgage payments may go up or down. With an ARM, you’ll have an initial period in which the loan offers a fixed-interest rate, usually for three, five or seven years. Once the initial period ends, the rate will reset at specified intervals. For instance, with a 5/1 ARM, the interest rate is fixed for the first five years, and then the rate may change once a year for the life of the loan.
Most ARMs are paid off over the course of 15 to 30 years and have an adjustment cap that limits how much the interest rate can go up or down at each adjustment period. For instance, the interest rate on a 5/1 ARM with a 5/2/5 cap structure can increase on the sixth year by a maximum of five percentage points above the initial interest rate (the first "five" in the cap). Every year thereafter, your rate can adjust a maximum of two percentage points (the "two" in the cap). However, your interest rate can never increase more than five percentage points throughout the life of the loan (the last "five" in the cap).
When choosing an ARM, you need to consider whether you can afford to make higher monthly payments three, five or seven years from now when your initial fixed-interest period ends. If you only plan to be in your house for a short period of time (five to 10 years), choosing an ARM with lower monthly payments may save you money. Of course, you always have the option to refinance an ARM to get a lower, fixed-interest rate.
This type of loan is a good option if you can’t afford to make a down payment. Rates, terms and restrictions vary, depending on the lender’s program. They’re often popular with first-time homebuyers, who may not have cash for a down payment.
The U.S. Department of Veterans Affairs (VA) guarantees loans made by qualified lenders, such as Navy Federal, to eligible servicemembers. This includes Active Duty personnel, veterans, reservists, National Guard members, and sometimes, unmarried surviving spouses.
With a VA loan, you can obtain 100% financing (meaning no down payment is needed) without having to pay PMI. Closing costs are also limited but do include a funding fee of up to 3.6% of the loan amount. Maximum loan amounts are determined by the property’s location.
Conforming and Jumbo Loans
As you’re shopping for a mortgage, you may hear the terms "conforming" and "jumbo" mentioned. These terms refer to the loan size.
Conforming loans follow a set of standards established by the Federal Housing Finance Agency. According to these guidelines, a lender can’t issue a conforming loan for more than $453,100 for a single-family home. However, certain high-cost areas of the country, such as Alaska and Hawaii, have super-conforming loans with higher price limits. A conforming loan can be a good option if you qualify since they generally offer lower interest rates.
A loan is considered jumbo if the loan amount exceeds the limits of a conforming loan. For example, you’ll need a jumbo loan if you take out a $500,000 mortgage to buy a home where the conforming loan limit is $453,100. Homebuyers often use jumbo loans to buy vacation homes and investment properties, in addition to primary residences.
Your down payment for a conforming or jumbo loan may vary depending on your lender and the type of home. Some conforming loans require as little as 3.5% down. Lenders used to require a 20% down payment for jumbo loans, but over the years, this amount has varied and may be less.
|For loan amounts up to $510,400 (up to $765,600 in Alaska and Hawaii)||For loan amounts of $510,401 ($765,601 in Alaska and Hawaii) to $2 million
|Lower interest rate||Higher interest rate|
|Fixed- or adjustable-interest rates as well as
|Fixed- or adjustable-interest rates as well as
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