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How to Choose the Best Mortgage

Inlanta Mortgage Grand Rapids is here to help Michigan homeowners choose the best mortgage for their financial goals and lifestyle. We know that buying a home is a big deal and that with so many different options out there, it can be hard to determine which option is right for you. So, an important place to start is to understand the general differences in loan types, from government-backed mortgages which carry an extra mortgage insurance premium, to conventional mortgages that require a heftier downpayment. A second consideration is the pros and cons of different repayment strategies and interest types.

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But first, start by asking yourself “How much house can I afford?” After taking inventory of your debts, credit score, income, living expenses and other monthly bills, you can make an informed decision about the terms of your mortgage.

  • Understand what kind of mortgage payment (with taxes and home insurance included) you can afford
  • Determine what kind of downpayment you can afford
  • With our help, find the best loan for your current circumstances and long-term goals
  • Get approved and funded with Inlanta Mortgage

Mortgage type: Government-backed or conventional?

There are two main types of mortgages: a conventional loan guaranteed by a private lender or banking institution, or a government-backed loan. If you don’t have a lot of cash saved up for a down payment but have solid credit and a stable income, a government-backed loan is often the way to go, provided you don’t mind paying a bit extra to cover private mortgage insurance (PMI). Private mortgage insurance is designed to guarantee your loan on behalf of the government, and with downpayments less than 20%, will cost approximately .5 to 1 % annually, depending on program.

Most government-backed mortgages come in one of three forms:

  • FHA loans, insured by the Federal Housing Administration, were established to make homebuying more affordable, especially for first-time buyers, by allowing down payments as low as 3.5% of the purchase price.
  • VA loans are insured by the Department of Veterans Affairs and offer buyers low- or no down payment options and competitive mortgage rates. They’re available to current military service members and veterans only.
  • USDA loans are backed by the U.S. Department of Agriculture and are geared toward rural property buyers who meet income requirements.

All three programs follow the limits for conforming loans and have low down payment requirements.

Conventional loans, on the other hand, are offered and backed by private entities such as banks, credit unions, private lenders or savings institutions. Borrowers need good credit to qualify. This is because the loans aren’t guaranteed by an outside source — so the possibility of borrower default poses a greater risk for lenders.

Conventional loans have terms of 10, 15, 20 or 30 years. They also require much larger down payments than government-backed loans. Borrowers are expected to put down at least 5%, but that amount can vary based on the lender and the borrower’s credit history.

If you are able to save up a large down payment, have a good credit score and a roomy debt-load ratio, a conventional loan is a great choice because it can eliminate some of the extra fees and higher interest rates that may come with a government-backed loan. For example, at 1% PMI on a $100,000 home loan is an extra cost of $1,000 a year or $83.33 a month!

 

Interest rate: Fixed or adjustable

Fixed-Rate Loans: The interest rate on a fixed-rate loan never changes. If you’re settled in your career, have a growing family and are ready to set down some roots, a 15- or 30-year fixed-rate loan might be your best bet, because you’ll always know what your monthly mortgage payment will be. It’s worth noting, though, that if other fees are rolled into your monthly mortgage payment, such as annual property taxes or homeowner’s association dues, there may be some fluctuation over time.

Adjustable-rate mortgages, or ARMs, have interest rates that reset at specific intervals. They typically begin with lower interest rates than fixed-rate loans, sometimes called teaser rates. After the initial term ends, the interest rate — and your monthly payment — increases or decreases annually based on an index, plus a margin. They most often appeal to younger, more mobile buyers who plan to stay in their homes for just a few years or refinance when the teaser rate is about to end. Paying a lower interest rate in those initial years could save hundreds of dollars each month that could fund other investments, but at the expense of the rate at which you build equity in your home. In a recessed market, ARMs can contribute to being under water on a mortgage because homes devalue quicker than any of the principal is paid.

Loan size: Conforming or non-conforming

Conforming loans meet the loan limit guidelines set by government-sponsored mortgage associations Fannie Mae and Freddie Mac. In 2016, conforming home loans for single-family homes in most Michigan counties is  $424,100 for a single family home.

Jumbo loans are for borrowers whose loan amounts are higher than the conforming loan limits in their areas. Jumbo loans are considered riskier and come with higher interest rates to protect lenders. You’ll need to make a larger down payment (at least 20%) and have pristine credit to qualify for one. Other types of non-conforming loans include those made to borrowers with poor credit, high debt or recent bankruptcies.

If you want to stay within conforming loan limits so you get a lower interest rate, you’ll need to tailor your home search to properties priced below the loan limit for your Michigan county. If you’re interested in purchasing a house that’s priced above $424,100 in Grand Rapids, for example, you can still qualify for a conforming loan if you have a big enough down payment to bring the loan amount down below the limit. If not, you would want to choose a Jumbo mortgage.