4 Considerations When Choosing a Mortgage

While searching for a new home is a very fun and exciting time, it is still a big and important decision in your life. As a result, you can’t let your excitement cloud your judgment. There are many tough choices to make, but not only related to the house you choose.

In fact, choosing the type and terms of your mortgage is just as important. With Americans having nearly $10 Trillion in mortgage debt and with over 1% of mortgages being in delinquency, you need to put a lot of thought into the type of mortgage you get. In an effort to help, this article will look at some considerations to make when applying for mortgages.

Fixed or Variable Interest Rate?

The interest rate of your mortgage is arguably the most important aspect, as it will dictate how much you spend overall. When it comes to interest rates, people looking for mortgages have two choices, they can either go with a fixed rate mortgage or a variable rate mortgage.

A fixed rate is just that, the interest rate will remain static throughout the term and won’t change, no matter what happens in the market. This is a great option for those who want stability or feel like the market rate will go higher. A variable rate means that the rate will change throughout the term, based on the prime rate. This is great for those who think interest rates will drop.

Government or Conventional Home Loan?

In general, there are two categories when it comes to getting a mortgage, and each has their own pros and cons. A government home loan is one that is backed by a branch of the U.S. government, and these are great for people with low or no downpayment, who have a “less than ideal” credit situation. However, they normally come with steep mortgage insurance premiums.

Conventional home loans are not backed by the government and generally require a decent credit score and a decent down payment, to avoid hefty mortgage insurance. Of course, you need to also be aware of the conventional loan limits and conditions as well. Speaking to an expert is a good idea if you are questioning which is better for you.

Conforming or Non-Conforming Mortgage?

This refers to the size of your loan, which can actually tell lenders a lot about your risk tolerance and level. The size of your loan will also influence the interest rate you end up getting. A conforming loan is one that meets the limit guidelines set out by Fannie Mae and Freddie Mac. The limit for single-family homes in most of the USA is $453,100.

A non-conforming loan is one that doesn’t meet these limits. An example is a jumbo loan, which is for higher amounts than the conforming limits. These generally require a person to have a large down payment and near-perfect credit, as they are inherently more risky than a loan for a lesser amount.

What Amortization Period and Term Do You Prefer?

This idea of amortization vs. term can be confusing for some people, so let’s clear the air. The mortgage amortization period refers to the total number of years that it will take to pay off your mortgage in full. The most common amortization period for loans is 30 years.

A term, on the other hand, is the specific length of time that you are locked in and committed to a certain lender and interest rate. The most common term for mortgages in 5 years and once they are done, you are free to look for a new provider and a better interest rate for the remainder of your amortization period.