The Best Loan for You

WHAT YOU WILL LEARN:

• Fixed-Rate
• Adjustable-Rate
• Hybrid
• Conventional
• Conforming
• Jumbo
• FHA 
• VA
• USDA
• Other Items to Consider Before Taking out a Mortgage Loan
• Next Steps to Take Before you Apply

Estimated Reading Time: 20 Minutes

What is a Mortgage Home Loan?

 

A mortgage is a type of loan that is used to finance the purchase of a home. When you take out a mortgage, you borrow money from a lender, typically a bank or other financial institution, to pay for the cost of the property over a specified period, typically ranging from 10 to 30 years. In exchange for the loan, the lender will require you to pay back the principal along with an additional percentage, known as interest.  

Mortgage loans can be classified and categorized in a few different ways. We'll start with how the loans are structured for repayment, which generally falls into two categories: fixed-rate and adjustable-rate mortgages.
 

Fixed-Rate Mortgage Loans

With a fixed-rate mortgage, the interest rate remains the same for the entire term of the loan. The most common fixed-rate loan term is 30 years, which is referred to as a 30-year fixed mortgage. 15-year loan terms are also popular. 
 
The primary advantage of a fixed-rate loan is the certainty of knowing your payment amount will not change. However, this certainty may come with the trade-off of slightly higher interest rates.

Who Are They Best For? 

Fixed-rate mortgage loans are an excellent choice for homebuyers who value predictability and stability. With a fixed-rate mortgage loan, you'll enjoy the peace of mind that comes with knowing your monthly payment will remain the same for the entire life of the loan. It's like having a secret recipe for financial stability that brings a smile to your face – no surprises or no sudden twists and turns – simply a reliable payment that won't play tricks on your budget.

This type of loan is ideal for those who plan to stay in their new home for the long haul. Additionally, long-term fixed-rate mortgages may grant you financial freedom to plan for your future with confidence.
 

Things to Be Cautious of 

Fixed-rate loans often come with slightly higher interest rates compared to adjustable-rate mortgages, which may result in slightly higher monthly payments in the short term. But, when you consider the comfort and predictability a fixed-rate mortgage can bring, it's a small price to pay for the serenity of knowing exactly what lies ahead. 

Another factor to consider is how long you plan to stay in your new home. If you anticipate a significant change in your financial situation or plan to sell your home within a few years, you might want to explore other options. 
 

 

Adjustable-Rate Mortgage Loans (ARM) 

With an adjustable-rate mortgage, also known as an ARM, the interest rate is adjusted periodically based on a specified financial index. Commonly used indexes include Secured Overnight Financing Rate Index (SOFR) and the 1 Year Treasury Index (1YTCMR). 
 
These loans typically have a low starting rate, therefore lowering your monthly payment compared to a fixed rate mortgage. However, because the rate is tied to an index that fluctuates based on market conditions, there is a risk of your monthly payment moving higher should the index move up. 

Who Are They Best For? 

Adjustable-rate mortgage loans can be a good fit for homebuyers who are not planning to stay in their new home for very long. If you plan to sell the property or refinance within a few years, an ARM can provide initial cost savings and flexibility.

Things to Be Cautious of 

ARMs aren't afraid of change. During their not-so-long lifespan, they go through adjustment periods, where the interest rate may change. If the market experiences significant interest rate increases, there's a chance that your once-affordable monthly payment might lose its harmony. Luckily, there are caps in place that limit how much the interest rate can increase or decrease during each adjustment period. Understanding these terms will help you anticipate potential changes in your monthly payment & budget accordingly.

 

Hybrid Mortgage Loans

Hybrid loans combine elements of both a fixed-rate and an adjustable-rate mortgage. They start off as a fixed rate for a set number of years and then convert to an adjustable mortgage. During the fixed rate period of the loan, there is usually a lower interest rate than a 30-year fixed mortgage. 
 
An example of such a loan is a 5-Year ARM or a 5/1 ARM. This means the loan's interest rate is fixed for the first 5 years then it becomes adjustable. Variations on the hybrid loans, such as a 3/1 ARM or 7/1 ARM, alter the length of the fixed part of the loan. In these instances, the fixed period would be 3 years and 7 years respectively. 

Who Are They Best For? 

For buyers who plan to stay in their new home for 5 years or less, a hybrid loan can be a more affordable alternative compared to a 30-year fixed mortgage. Additionally, hybrid loans can be a great option for individuals who want to take advantage of the initial fixed-rate period to establish a more manageable payment structure in the short term.

Things to Be Cautious of

When the fixed-rate period of the loan ends and the adjustment period begins, your interest rate may start to fluctuate. There is a possibility that your interest rate will increase, resulting in higher monthly payments, which may become unaffordable for some borrowers. It’s important to plan for potential payment increases during the adjustment period to ensure it aligns with your budget and financial goals. 
 

 

Conventional Mortgage Loans 

A conventional mortgage loan is not backed by the federal government. Instead, they are backed by private lenders and follow guidelines set by loan investors like Fannie Mae and Freddie Mac. While interest rates for conventional mortgage loans are typically lower than other options, they typically require a higher credit score compared to government-backed loan programs.  

Conventional mortgages come primarily in two varieties, Conforming and Jumbo. This distinction refers to the loan amount. Conforming loans fit snugly within certain limits, designed to streamline the underwriting process. On the other hand, jumbo loans, with their grander loan amounts, are considered riskier and may come with higher interest rates. 

Who Are They Best For? 

Conventional mortgage loans are best for borrowers with strong credit, stable income history, and the financial ability to make at least 3-5% down payment. However, for those aiming to avoid private mortgage insurance (PMI), a 20% down payment is generally the sought-after key. Luckily, there are some lenders who offer enticing variations of conventional loans, granting low down payment requirements and no private mortgage insurance. 

Things to Be Cautious of 

If your credit is not in good standing, you may face difficulties in meeting the qualification criteria set by lenders. Although the minimum down payment is only 3-5%, borrowers who put less than 20% down will likely have to buy PMI, which can add to the overall cost of the loan.
 

 

Conforming Mortgage Loans 

A conforming mortgage loan is a type of conventional loan that is subject to a maximum loan amount set by the government. As of 2023, the baseline conforming loan limit begins at $726,200, (up from $647,200 in 2022), though the specific amount tends to vary based on where you are buying your home. The FHFA typically sets a higher maximum loan limit in certain parts of the country where the home prices exceed the baseline, such as New York City or San Francisco.  

Who Are They Best For? 

Conforming mortgage loans are a good option for individuals with good credit and stable financial backgrounds. If you are purchasing a property with a loan amount that falls within the conforming loan limit for your area, a conforming mortgage loan may be a good choice for you. 

Things to Be Cautious of 

Conforming loans typically require a down payment of at least 3% to 5% of the purchase price. Like conventional loans, PMI is required if your down payment is less than 20% of the purchase price.
 

 

Jumbo Mortgage Loans 

A jumbo mortgage loan (also called non-conforming) is a type of conventional loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency (FHFA) for Fannie Mae and Freddie Mac. In 2023, single-family mortgages with balances higher than $726,200 in most U.S. counties (and $1,089,300 in high-cost areas) will be considered jumbo. 

Who Are They Best For? 

Jumbo mortgage loans are best for borrowers who live in an area with high home prices, or who may need a larger amount than the average home price in their area. 

Things to Be Cautious of 

A lender takes on more risk with a jumbo loan, so the borrower usually must have strong credit, large cash reserves, and make a down payment of 10% to 20%.
 

 

FHA Mortgage Loans 

A Federal Housing Administration loan, or FHA loan, is a type of government insured loan designed to help individuals with lower credit scores or limited cash available for a down payment to become homeowners. The government's role in these loans is to guarantee their repayment to the lender in the event of a default. Because of the added security this government backing provides, the underwriting rules may be more flexible and people that would otherwise not qualify for a loan may be able to obtain one. Essentially, you still go through the same process as a conventional mortgage - just with some additional paperwork. 

Who Are They Best For? 

FHA loans are best for eligible lower income borrowers who may not qualify for conventional loan products, or who may lack the funds to afford a down payment. In addition, first-time homebuyers can often qualify for an FHA loan. FHA loans also have more relaxed credit requirements, allowing borrowers with a credit score as low as 500 to qualify with a 10% down payment or a score as low as 580 to qualify with a 3.5% down payment. 

Things to Be Cautious of 

The FHA requires all borrowers to pay an annual mortgage insurance premium (MIP), a type of mortgage insurance that protects the lender from borrower default. An MIP requires both an upfront payment and a monthly insurance premium, which can increase your overall monthly payment. 
 

 

VA Mortgage Loans 

VA loans are government insured loans guaranteed by the U.S. Department of Veterans Affairs. VA loans often offer competitive interest rates, zero down payment requirements, and do not require a monthly insurance premium, making them an attractive option for eligible individuals looking to purchase a home. VA loans also do not have a minimum credit limit, though lenders will still take a look at your finances to ensure you can pay back the loan.  

Who Are They Best For? 

To meet the eligibility requirements for a VA loan, borrowers must fall into one of three categories: military veteran, active-duty member, or eligible surviving spouse. They are best for eligible borrowers who are looking for competitive rates and terms. Since there is no minimum credit limit requirement, VA loans are especially beneficial if your credit is less than ideal. 

Things to Be Cautious of 

One important consideration of VA loans is the associated funding fee, a percentage of the loan amount that helps offset the cost to taxpayers. The funding fee can vary based on your military service category and loan amount, so it's essential to factor in this fee when assessing the overall cost of the loan and budgeting for your mortgage. 
 

 

USDA Mortgage Loans 

USDA loans, guaranteed by the U.S. Department of Agriculture (USDA), aim to facilitate homeownership for low-income buyers in rural areas across the country. These loans offer the opportunity for qualified borrowers to purchase a home with little to no money down, as long as the property meets the USDA's eligibility criteria.  

Who Are They Best For? 

USDA loans can provide an affordable financing option with reduced interest rates and mortgage insurance costs for those with lower to moderate incomes in rural and suburban areas. Borrowers who may not qualify for conventional loan products or struggle with saving for a down payment can benefit from the accessibility and affordability provided by USDA loans. USDA loans typically come with a fixed-rate, 30-year term, so they are best suited for those who plan to stay in their home for a long time.  

Things to Be Cautious of 

Even if your home is located in a USDA-eligible area, qualification for a USDA loan is not guaranteed. To qualify, borrowers must also meet certain household income limits and have a debt-to-income ratio of 41% or less. In addition, your total monthly payment should not exceed 29% of your monthly income. However, the good news is that there are no strict minimum credit score requirements. What matters is your ability to demonstrate that you can comfortably repay the loan. Learn more about USDA loan eligibility requirements here. 
 

 

Other Items to Consider Before Taking out a Mortgage Loan

Before committing to a mortgage loan, there are several important factors to consider: 
 

• ​Affordability: Assess your financial situation and determine how much you can comfortably afford to borrow. Consider your monthly income, existing debts, and expenses to ensure that your mortgage payments fit within your budget. Use our mortgage calculator to help you estimate your costs/ 

• Closing Costs: Remember to take into account the closing costs associated with obtaining a mortgage. These costs typically include appraisal fees, loan origination fees, title insurance, and attorney fees. If you’re saving funds to close, your loan originator can help to see how you are tracking. 

• Mortgage Insurance: Depending on the type of loan and down payment amount, you may be required to pay for private mortgage insurance (PMI) or other forms of mortgage insurance on top of your monthly loan payment. 

• Loan Terms and Conditions: Thoroughly review and understand the terms and conditions of the mortgage loan you're considering. Pay attention to details such as prepayment penalties, adjustment periods, and potential future refinancing options.

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Next Steps to Take Before you Apply

When you're preparing to apply for a home mortgage loan, there are a few important steps to take to prepare. First and foremost, you should start by taking stock of your financial situation and gathering the necessary documents like pay stubs, tax returns, and bank statements. You can use these materials to calculate your household income and estimate your monthly debt-to-income ratio (DTI). Together, these figures will help you understand your monthly budget. Next, you can reach out to a loan originator to get pre-qualified, where they'll guide you through the process, review your finances, and help you choose the right mortgage option. Discover more about our 5-step mortgage process.
 

Why Choose Shea Mortgage? 

At Shea, we not only want you to feel confident in your home buying decision but also well-equipped for the journey ahead. We understand that there are many options available when it comes to selecting a home mortgage lender, but we are confident that our team of experts stands out from the rest. Learn more about Shea Mortgage speak with a member of our shea mortgage team today! 

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