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How to pick the best mortgage

Shopping for a mortgage requires you to be a smart consumer. You need to know the ins and outs of the different types of loans available, plus what factors influence your interest rate and the fees you’ll pay.

We’ll cover both of those here.

A quick guide to the different types of loans you can choose from

Before you start shopping for mortgages, you’ll want to determine what type of loan and loan program fits your needs the best. This will help you narrow down your choices.

Fixed-rate mortgages

The fixed-rate mortgage is by far the most popular choice for first-time homebuyers, particularly the 30-year fixed rate mortgage. With this loan, your interest rate will never change, providing a stable monthly payment for the life of the loan.

Adjustable-rate mortgages

The adjustable rate mortgage, or ARM, can be a valuable option if you want to save money for a short period of time. Adjustable-rate mortgages include an initial interest rate that is usually lower than a fixed rate. But when that initial period ends in three, five or seven years, the payment will adjust higher depending on current market conditions.

Conventional mortgages

Conventional mortgages are based on rules set by government-sponsored entities Fannie Mae and Freddie Mac. They’re the most common type of home loan because of the flexibility they offer. Down payments can be as low as 3%, though mortgage insurance is required if you make less than 20% down payment. However, PMI can be canceled as your home value goes up, which makes it a popular choice for home buyers.

Conventional mortgages can have fixed or adjustable rates.

Government insured loan programs

There are a number of government loan programs available that provide additional options for homebuyers depending on their financial situation and homebuying needs.

  • FHA loans are insured by the government and are a common choice of first-time homebuyers. They’re easier to qualify for if you have a lower credit score.
  • The VA loan program allows eligible active duty and veteran members of the armed forces to purchase a home with a low down payment or none at all.
  • USDA loans help low- to moderate-income families to buy homes in designated rural areas.

Most government-backed loans are available in fixed or adjustable rates.

Jumbo mortgages

Conventional mortgages sold to Fannie Mae and Freddie Mac have limits on how big a loan you can get, set at $484,350 in most parts of the country and $726,525 in high-cost areas. In some more expensive areas of the country where real estate prices are higher than these limits, a jumbo loan may be the best and only option for financing a home purchase.

Jumbo loans usually require much more scrutiny and documentation than other loan types, but qualified buyers often find the rates are lower than conventional mortgage rates. You can find fixed-rate or adjustable-rate jumbo loans.

Advantages and disadvantages of different loan types
Loan type Advantages Disadvantages Best choice for
Fixed-rate mortgage
  • Interest rate and payment are stable for life of loan
  • Easier to qualify for
  • Most lender options
  • Lowest down payment options
  • You pay more interest at beginning of your repayment period.
Borrowers who want the safety of a consistent payment and easier qualifying options
Adjustable-rate mortgages
  • Lower initial interest rates and payments
  • Rates and payments could increase in future
  • Payment increases could make payments hard to make
  • Adjustment terms can be complex, making future rate and payments a guessing game
  • Harder to qualify for
Borrowers who need temporary savings, and either have growing income to cover future increases, or plan to sell home before the fixed-rate period is up.
Conventional mortgages
  • As little as 3% down payment
  • Can purchase a primary residence, second home or investment property
  • Mortgage insurance (PMI) can be removed or reduced as home value goes up
  • Digital approval process may reduce documents needed
  • Minimum score requirement is 620
  • Lower credit scores result in higher monthly PMI expense
Higher credit score borrowers
FHA loans
  • Scores as low as 580 with 3.5% down payment
  • Scores as low as 500 with 10% down payment
  • Mortgage insurance costs are not affected by low credit scores
  • Seller can pay up to 6% of buyer closing costs
  • Streamline refinance programs allow for refinance with no income documents or appraisal
  • Mortgage insurance for life of the loan with minimum down payment
  • Two forms of mortgage insurance add to costs
  • Appraisals have more stringent property requirements
Borrowers with little savings and lower credit scores.
VA loans
  • 0% down payment possible
  • Lenders look at your overall financial picture, not just credit scores and debt ratios.
  • Seller can pay up to 6% of buyer closing costs
  • Streamline refinance options with no appraisal or income requirements
  • Funding fee of up to 3.3% of loan amount
  • More restrictions on property and more expensive appraisals
  • Non-military borrowers not eligible
For active duty military or veterans, this is the best program with 0% down payment and the most qualifying flexibility of any loan program.
USDA
  • 0% down payment option
  • Lower upfront and monthly guarantee fees
  • Flexible underwriting for low-to moderate income borrowers
  • Easier qualifying for manufactured homes
  • Property must be in a USDA eligible area
  • 640 minimum credit score
  • Income limits cannot be exceeded
Low- to moderate-income borrowers purchasing in rural areas of the country who have no down payment
Jumbo Loans
  • Lower rates than conventional mortgages
  • Allows for more expensive properties to be purchased with as little as 10% down payment
  • May have specialized qualifying guidelines for high net worth borrowers
  •  Can buy primary, second homes or investment properties
  • Require higher credit scores to be eligible
  • Higher down payments required for lower credit scores
  • Payment reserves are required in addition to down payment
High net worth borrowers purchasing expensive properties, in high cost areas of the country.

 

What goes into your rate and fees

Once you’ve chosen your loan program, the actual interest rate you’ll receive and fees you’ll pay can vary depending on your financial picture and the type of property you’re buying. Here’s what goes into your costs.

Your credit score

Your credit score will determine how low or high your interest rate will be. The higher your scores, the lower your rate will be. Some programs also have minimum scores to qualify, so make sure know the credit scores you need to buy or refinance your home. A score of 740 and above is considered excellent, 680 to 739 is very good, 679 to 640 is fair, and 500 to 639 is considered poor.

How big your loan is

The higher your loan amount, usually the better your rate will be.  Be sure to read the fine print if you see online rates advertised. Very often the rates will be based on a $200,000 to $300,000 loan amount. Smaller loan amounts very often come with higher interest rates or costs.

For jumbo loans, you can expect lower rates than conventional mortgages, especially if you have exceptional credit.

What type of property you are buying

The best rates are usually offered for a single-family residence, so if you’re buying a manufactured home, condominium, or multi-family home, the rates and costs will often be higher.

Monthly mortgage offer reports

Released each month, The LendingTree Mortgage Offers Report contains data from actual loan terms offered to borrowers on LendingTree.com by lenders. Stay up to date with the most recent LendingTree Mortgage Offers Reports below:

April 2019 Report
March 2019 Report

Mortgage rates by state

Mortgage rates can vary a lot between lenders on any given day. So, if you only get one mortgage quote, you won’t have any idea if there’s a better deal out there. That’s why the best way to get a mortgage rate it to request quotes from multiple lenders and compare interest rates, loan terms and closing costs. It puts you on in charge and keeps the banks competing to get you the best rate possible. Remember, even .1 percent can amount to thousands of dollars over the course of a loan. Make sure you shop around!

Additional resources

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Home Affordability Calculator

Calculate how much home you can afford based on your income, expenses, down payment and credit score.

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Refinance Calculator

Use this calculator to figure out when you can expect to break even on your mortgage refinance loan.

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Mortgage Refinance Rates

Compare current, customized mortgage refinance rates from our top-rated lenders.

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FHA Loan Rates

View our FHA loan rate table to see current, up-to-date interest rates by our top-rated FHA lenders.

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VA Loan Rates

Comparison shop VA loans which offer some of the best, most competitive loan rates available today.

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