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How to Find the Right Mortgage

Let’s start at the beginning…

What is a mortgage?

A mortgage is a loan from a financial institution that lets you purchase a house without paying the entire amount upfront. A mortgage is secured by the home itself, so the bank can sell the home and recoup the money it loaned to you if you default on the loan.

How does a mortgage work?

In a mortgage agreement, a borrower agrees to a set length of time to repay the money, at a certain interest rate and under specific terms, and makes payments in equal monthly installments.

What are the different types of mortgages?

There are three main types of mortgages:

  • Conventional loans, which are any mortgages not insured or backed by the federal government.
  • Government-insured loans, which are backed by the federal government but offered by private lenders.
  • Jumbo loans, which are conventional loans where the home prices exceed federal loan limits.

Fixed-rate mortgages

Fixed-rate mortgages are the most common mortgage type. The interest rate remains the same for the life of the loan. With a fixed-rate mortgage, your monthly payment won’t change (outside of property taxes, insurance premiums or homeowner’s association fees).

Adjustable-rate mortgages

Adjustable-rate mortgages, or ARMs, have an initial fixed-rate period during which the interest rate doesn’t change, followed by a longer period during which the rate may change at preset intervals. Generally, interest rates are lower to start than with fixed-rate mortgages, but they can rise, and you won’t be able to predict future monthly payments.

Jumbo mortgages

Jumbo mortgages are conventional loans that have non-conforming loan limits. This means the home prices exceed federal loan limits. For 2019, the maximum conforming loan limit for single-family homes in most of the U.S. is $484,350, according to the Federal Housing Finance Agency. Jumbo loans are more common in higher-cost areas and generally require more in-depth documentation to qualify.

Government-insured loans

Government-insuraed loans are backed by three agencies: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans). The U.S. government isn’t a mortgage lender, but it sets the basic guidelines for each loan type offered through private lenders.
You can find more information in the article, 5 Types of Mortgage Loans for Homebuyers.

How long do you repay a mortgage?

Mortgages come in various repayment terms, including fixed-rate loans of 10, 15, 20, 30 or 40 years. Another option is an adjustable-rate mortgage, or ARM, which has an initial, fixed-rate interest period of three, five, seven or 10 years. After the initial time frame, an ARM resets and interest rates can go up or down for the remaining life of the loan.

How do I choose the best mortgage?

The mortgage you choose depends on a variety of factors, including your credit history and score, debt-to-income ratio, down payment amount and employment history. It also depends on how long you play to stay in the home, what type of property you’re interested in, and if you meet the lender’s borrowing requirements.
Narrowing your loan choices can be difficult. Here’s a list of pros and cons of each of the options mentioned earlier to help you decide.

Pros and Cons of Different Loan Types

Fixed-rate mortgages Pros

 

  • Rates and payments remain constant, despite interest rate changes.
  • Stability makes it easier to budget.
  • Simple to understand.
 Cons

 

  • Interest payments tend to be higher.
  • To get a lower rate, borrowers have to refinance the loan — and pay closing costs again.
 Who it’s best for

 

Borrowers who plan to stay in a home many years and want predictable, stable payments at the same interest rate for the life of the loan.
Adjustable-rate mortgages Pros

 

  • Feature lower rates and payments early in the loan term.
  • May qualify for more house because payments are lower (initially).
  • Help you save and invest more money with a lower payment early in the loan.
 Cons

 

  • Rates and payments can rise over the life of the loan.
  • Higher rates — and payments — when loan resets can be hard to manage.
  • ARMs are difficult to understand.
  • Lenders have much more flexibility to customize.
 Who it’s best for

 

Borrowers who don’t plan to stay in a home for more than a few years — especially when rates are higher.
Conventional mortgages Pros

 

  • Can be used for a primary home, second home or investment property.
  • Overall borrowing costs tend to be lower than other loan types.
  • PMI is cancellable once you’ve gained 20 percent equity.
  • Put as little as 3 percent down for agency loans.
 Cons

 

  • Minimum FICO score of 620.
  • Debt-to-income ratio of 45 to 50 percent.
  • PMI typically required if your down payment is less than 20 percent.
  • Significant documentation required to verify income, assets, down payment and employment.
 Who it’s best for

 

Borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.
Government-insured mortgages Pros

 

  • More relaxed credit requirements.
  • Don’t require a large down payment.
  • Open to repeat and first-time buyers.
 Cons

 

  • Mandatory mortgage insurance premiums that cannot be canceled on some loans.
  • Higher overall borrowing costs.
  • May require more documentation to prove eligibility.
 Who it’s best for

 

Borrowers who have low cash savings, less-than-stellar credit or can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for military borrowers.
Jumbo mortgages Pros

 

  • Borrow more money to buy a home in an expensive area.
  • Interest rates tend to be competitive with other conventional loans.
 Cons

 

  • Down payment of at least 10 to 20 percent is needed.
  • Minimum FICO score of 660, but average is typically 700 or higher.
  • Maximum DTI ratio of 45 percent.
  • Must have significant assets (10 percent of the loan amount) in cash or savings accounts.
 Who it’s best for

 

Affluent borrowers purchasing a high-end home who also have good to excellent credit, high incomes and a substantial down payment.

Whether it’s a conventional, FHA, or VA loan, find out which mortgage is the best for you.

How do I find the best mortgage rate?

To find the best mortgage rate, shop around with at least three different lenders to compare products and rates. Typically, the higher your credit score and the less debt you have, the more competitive interest rates lenders can offer.

What is the difference between APR and interest rate?

The annual percentage rate, or APR, includes the interest rate and all other borrowing costs, such as mortgage insurance and other loan fees, and is expressed as a percentage. It gives you an overall idea of the loan’s true borrowing costs. The interest rate is a fee a lender charges you to borrow the principal loan amount. It can be variable or fixed, but it’s always expressed as a percentage.
Find out more about the difference between interest rates and APR.

When is the right time to get a mortgage?

The first step in getting a mortgage is to get preapproved, and it’s best to do this before you start looking at homes. A preapproval might reveal you need to work on credit issues or pay down debt, so it’s best to speak to a lender as early as possible to identify — and resolve — potential obstacles.

How much can I borrow for a mortgage?

The maximum loan amount will vary depending on the type of mortgage you choose, federal loan limits and the specific down payment requirements for the type of mortgage you want. For example, VA and USDA loans allow you to finance 100 percent of the home’s purchase price, while FHA loans require 3.5 percent down and conventional loans require at least 3 percent down.

How do I refinance a mortgage?

Refinancing a mortgage makes sense if you can get a lower interest rate than your current mortgage to lower your payments, or to shorten your loan term and cut interest payments significantly. Like getting a new mortgage, refinancing requires a loan application, and you must have at least 20 percent equity in your home, either through paying down your principal loan balance or because your home’s value has increased since you bought it.
According to Bankrate.com rates as of 09/20/2019 at 6:30 AM are as follows:

Today’s Mortgage Interest Rates for Purchase

Product Interest Rate APR
30-Year Fixed Rate 3.74% 3.86%
20-Year Fixed Rate 3.65% 3.82%
15-Year Fixed Rate 3.21% 3.42%
30-Year FHA 3.38% 3.45%
30-Year VA 3.44% 3.51%
5/1 ARM 4.21% 7.29%
7/1 ARM 4.08% 6.47%
10/1 ARM 4.44% 6.19%
30-Year Fixed Rate Jumbo 4.13% 4.25%
15-Year Fixed Rate Jumbo 3.87% 4.08%
5/1 ARM jumbo 3.99% 7.10%
7/1 ARM jumbo 3.84% 6.24%

Once you choose a bank or lender, you’ll apply for a mortgage directly with them. Then, you’ll be on your way to your new home.

1. Compare rates

2. Get a quote

3. Apply

See the original article at: https://www.bankrate.com/mortgage.aspx

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