Identifying your current needs and future goals can help with choosing a home loan; these considerations provide a framework for how to choose a mortgage:
You want a fixed rate mortgage with no risk of interest rate changes: Fixed rate mortgages are typically available with 15 or 30 year repayment terms. A fixed rate mortgage has stable principal and interest payments throughout the life of the loan. Your mortgage payment can change based on amounts collected for paying property taxes and insurance. A fixed rate mortgage is fully amortized and does not include exotic features such as deferred interest.
Cash available for down payment and closing costs: Do you have enough funds for a 20 percent down payment plus closing costs? If not, you can choose an FHA insured mortgage that allows as little as a 3.50 percent down payment. The downside is that a down payment of less than 20 percent requires that you pay for FHA mortgage insurance. The annual premiums are pro-rated and added to your monthly mortgage payment. Conventional loans are also available with down payments of less than 20 percent, but private mortgage insurance is required.
You are eligible for benefits through the U.S. Department of Veterans Affairs: You may be eligible for a VA guaranteed mortgage that allows you to finance 100 percent of a home's appraised value. The VA must determine your eligibility for a VA guaranteed mortgage and you must also qualify for a mortgage through a VA approved lender.
How long you plan to keep the home you're buying: If you plan on moving within a few years, you may want to consider a hybrid adjustable rate mortgage that offers a low initial fixed rate for one to five or more years. When the fixed rate period expires, this type of mortgage converts to an adjustable rate mortgage that adjusts once a year. The Consumer Financial Protection Bureau (CFPB) advises that hybrid mortgages are identified as 1/1, 3/1 or 5/1 hybrid loans. The first number indicates the number of years the initial fixed rate will last, and the second number indicates how often a hybrid loan adjusts after the fixed rate period expires. A 5/1 adjustable rate mortgage has a fixed rate for five years and adjusts annually after the fixed rate period expires. The initial fixed rate is helpful for home buyers desiring low payments, but it's important to determine if loans you're considering include a prepayment premium. This can reduce or negate savings gained from low initial rates. Low initial fixed rates are helpful if you want low mortgage payments, but it's important to determine if home loans you're considering include a prepayment premium. This can reduce or negate savings gained from low "teaser" rates.
You want to pay off your mortgage faster: A 15-year mortgage can help achieve this goal if you can handle higher monthly payments. A shorter mortgage repayment term can help in two ways; mortgage rates for 15-year mortgages are lower than for 30-year mortgages and you'll pay less interest over the shorter repayment term.