How to Choose the Best Mortgage for Your Home

Buying a home is one of the biggest financial decisions you will ever make. It can also be one of the most confusing and stressful ones, especially when it comes to choosing the right mortgage. 

A mortgage is a loan that you use to buy or refinance a home. It has two main components: the principal, which is the amount you borrow, and the interest, which is the cost of borrowing the money. 

The interest rate and the term (the length of time you have to repay the loan) are two of the most important factors that affect how much you pay each month and over the life of the loan.

There are many types of mortgages available, each with its own advantages and disadvantages. Some are backed by the federal government, while others are offered by private lenders. Some have fixed interest rates and payments, while others have variable rates and payments that can change over time. 

Some require a large down payment, while others allow you to buy a home with little or no money upfront. Some have strict eligibility requirements, while others are more flexible and forgiving.

How do you know which mortgage is best for you? There is no one-size-fits-all answer. It depends on your personal and financial situation, your goals and preferences, and your plans for the future. You need to compare different lenders, fees, rates, terms, and features to find the best option for you. You also need to understand the pros and cons of each type of mortgage and how they work.

In this article, we will explain the basics of how mortgages work and what you need to know before you apply for one. We will also review the six main types of mortgages and their characteristics:

1. Conventional mortgages
2. Conforming mortgages
3. Nonconforming mortgages
4. FHA-insured mortgages
5. VA-insured mortgages
6. USDA-insured mortgages

We will also give you some tips on how to improve your chances of getting approved for a mortgage and how to save money on your mortgage payments.


What Is a Mortgage?

A mortgage is a loan that you use to buy or refinance a home. The home serves as collateral for the loan, which means that if you fail to make your payments, the lender can take possession of the home (foreclose) and sell it to recover its money.

When you apply for a mortgage, you need to provide information about your income, assets, debts, credit history, and the property you want to buy or refinance. The lender will use this information to evaluate your ability and willingness to repay the loan. The lender will also appraise the value of the property to make sure it is worth enough to secure the loan.

The lender will then offer you a loan amount, interest rate, term, and monthly payment that reflect its assessment of your risk as a borrower. The lower your risk, the more favorable your loan terms will be. The higher your risk, the less favorable your loan terms will be.

The loan amount is the total amount of money you borrow from the lender. It is usually equal to or less than the purchase price or appraised value of the property, whichever is lower. The interest rate is the percentage of the loan amount that the lender charges you for borrowing the money. It can be fixed or variable. 

A fixed interest rate stays the same throughout the term of the loan, which means that your monthly payment will also stay the same. A variable interest rate can change periodically based on market conditions, which means that your monthly payment can also change.

The term is the length of time you have to repay the loan. It can range from 10 to 40 years, but most mortgages have terms of 15 or 30 years. The shorter your term, the higher your monthly payment will be, but the less interest you will pay over time. The longer your term, the lower your monthly payment will be, but the more interest you will pay over time.

The monthly payment is the amount of money you have to pay each month to repay your loan. It consists of four parts: principal, interest, taxes, and insurance (PITI). The principal is the portion of your payment that goes toward reducing your loan balance. 

The interest is the portion of your payment that goes toward paying the cost of borrowing money. The taxes are property taxes that are levied by local governments on real estate owners. The insurance is homeowners insurance that protects you and the lender from losses due to fire, theft, natural disasters, and other hazards.

In addition to PITI, some mortgages may require you to pay other fees or charges as part of your monthly payment. These may include:

- Private mortgage insurance (PMI)

This is a type of insurance that protects the lender from losses if you default on your loan. It is usually required if your down payment is less than 20% of the purchase price or appraised value of the property. You can cancel PMI once your loan balance reaches 80% or less of the original value of the property.

- Mortgage insurance premium (MIP)

This is a type of insurance that protects the lender from losses if you default on your loan. It is required for all FHA-insured mortgages, regardless of your down payment. You have to pay an upfront MIP at closing and an annual MIP as part of your monthly payment. The amount of MIP depends on your loan amount, term, and loan-to-value ratio (LTV).

- Funding fee

This is a fee that you have to pay to the VA to help cover the cost of the VA-insured mortgage program. It is required for all VA-insured mortgages, unless you are exempt due to disability or other reasons. You can pay the funding fee upfront at closing or roll it into your loan amount. The amount of the funding fee depends on your loan amount, term, LTV, and whether you are a first-time or repeat borrower.

- Guarantee fee

This is a fee that you have to pay to the USDA to help cover the cost of the USDA-insured mortgage program. It is required for all USDA-insured mortgages. You have to pay an upfront guarantee fee at closing and an annual guarantee fee as part of your monthly payment. The amount of the guarantee fee depends on your loan amount and LTV.


The 6 Main Types of Mortgages

There are many types of mortgages available, but they can be broadly classified into six main categories based on who offers them and who guarantees them:

1. Conventional mortgages

These are mortgages that are not backed by any government agency. They are offered by private lenders, such as banks, credit unions, and online lenders. They usually require a higher credit score, a lower debt-to-income ratio (DTI), and a larger down payment than government-backed mortgages. They also have more flexibility in terms of loan amounts, interest rates, terms, and features.

2. Conforming mortgages

These are conventional mortgages that meet the standards set by Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy and sell most conventional mortgages in the U.S. These standards include maximum loan limits, minimum credit scores, maximum DTIs, and minimum down payments. Conforming mortgages usually have lower interest rates and fees than nonconforming mortgages because they are considered less risky by lenders.

3. Nonconforming mortgages

These are conventional mortgages that do not meet the standards set by Fannie Mae and Freddie Mac. They are also known as jumbo mortgages because they exceed the conforming loan limits. They are offered by private lenders who are willing to take on more risk for higher returns. 

They usually require a higher credit score, a lower DTI, and a larger down payment than conforming mortgages. They also have higher interest rates and fees than conforming mortgages because they are considered more risky by lenders.

4. FHA-insured mortgages

These are mortgages that are backed by the Federal Housing Administration (FHA), a government agency that provides mortgage insurance to lenders who make loans to low- and moderate-income borrowers. They are offered by FHA-approved lenders, such as banks, credit unions, and online lenders. They usually require a lower credit score, a higher DTI, and a smaller down payment than conventional mortgages. They also have lower interest rates and fees than conventional mortgages because they are guaranteed by the FHA.

5. VA-insured mortgages

These are mortgages that are backed by the Department of Veterans Affairs (VA), a government agency that provides mortgage insurance to lenders who make loans to eligible veterans, service members, and surviving spouses. They are offered by VA-approved lenders, such as banks, credit unions, and online lenders. They usually do not require a credit score, a DTI, or a down payment at all. They also have lower interest rates and fees than conventional mortgages because they are guaranteed by the VA.

6. USDA-insured mortgages

These are mortgages that are backed by the U.S. Department of Agriculture (USDA), a government agency that provides mortgage insurance to lenders who make loans to rural and suburban homebuyers who meet certain income and property eligibility requirements. 

They are offered by USDA-approved lenders, such as banks, credit unions, and online lenders. They usually require a lower credit score, a higher DTI, and no down payment at all. They also have lower interest rates and fees than conventional mortgages because they are guaranteed by the USDA.


How to Choose the Best Mortgage for You

Choosing the best mortgage for you depends on several factors, such as:

- Your financial situation

This includes your income, assets, debts, credit history, and savings. You need to assess how much you can afford to borrow and repay each month and over time. You also need to consider your future goals and plans, such as retirement, education, or travel.

- Your loan options

There are different types of mortgages available, such as conventional, conforming, nonconforming, FHA-insured, VA-insured, and USDA-insured loans. Each one has its own requirements, benefits, and drawbacks. You should learn about the pros and cons of each option and find out which one suits your needs and qualifications.

- Your lender options

There are various sources of mortgage loans, such as banks, credit unions, online lenders, and local lenders. You should shop around and compare different lenders and their rates, terms, fees, and customer service. You should also ask for referrals from friends, family, or professionals who have recently bought a home or refinanced their mortgage.

- Your loan costs

The cost of a mortgage loan is not only determined by the interest rate, but also by other fees and charges that you may have to pay upfront or over the life of the loan. These include origination fees, appraisal fees, closing costs, private mortgage insurance (PMI), escrow fees, and prepayment penalties. You should ask for a loan estimate from each lender you are considering and compare the total costs of each loan.

By following these steps, you can find the best mortgage for you and save money and time in the process.