Resources by SYO Mortgage
Applying for a home loan can be complicated.
So we make it easier (and way better).
Researching types of mortgages and which type of mortgage best suits you, is well, complicated.
When buying a home, there are a ton of loans to choose from, so it's important to fully understand the advantages and disadvantages of each type before you make a decision.
Selecting the right mortgage can lower your down payment and decrease the overall interest payment over the life of the loan.
A conventional mortgage is best suited for home buyers with a stable income, who pay at least 3% down and have strong credit.
Conventional mortgages are the most common type of mortgage, although having stricter regulations on your credit score and your debt-to-income (DTI) ratio.
A conventional loan requires a minimum credit score of 620 to qualify and allows you to purchase a home with 3% down.
A down payment of less than 20% means you’ll need to pay for PMI. Mortgage insurance rates are usually lower for conventional loans compared to other types of loans (like FHA loans).
If you provide a 20% down payment, you can skip buying private mortgage insurance (PMI).
Conventional loans are a good choice for most borrowers who want to take advantage of lower interest rates with a larger down payment. If you are not able to provide at least 3% down but you’re eligible, you can also consider a USDA loan or a VA loan.
Advantages of a Conventional Mortgage
- The overall borrowing cost after fees and interest tends to be lower than an unconventional loan.
- Your down payment can be as little as 3% for qualifying loans.
Disadvantages of a Conventional Mortgage
- You have to pay PMI if the down payment is less than 20%.
- Stricter qualifications that require a minimum credit score of 620 and low DTI.
A fixed-rate mortgage is best suited for home buyers that are purchasing or refinancing their forever home.
A fixed-rate mortgage has the same interest rate throughout the duration of the loan. Due to changes in property tax and insurance rates, the amount you pay per month may fluctuate, but for the most part, a fixed-rate mortgages offer home buyers very predictable monthly payment.
If you are currently living in your "forever home", a fixed-rate mortgage gives you a better idea of how much your mortgage payment will be each month and offers solidity in a long term plan.
It is important to speak to a local real estate agent or a Home Loan Expert to learn how market interest rates are trending. If interest rates in your area are high, you may want to avoid fixed-rate mortgages. Unless you refinance, you will be locked in with your interest rate for the duration of your mortgage, with the possibility of overpaying thousands of dollars in interest.
Advantages of a Fixed-Rate Mortgage
- Monthly payments don’t change over the life of your loan, making it easier to plan a budget.
Disadvantages of a Fixed-Rate Mortgage
- You may end up paying more in interest over time if the rates are high.
An adjustable-rate mortgage is best suited for home buyers who are purchasing a starter home and don’t expect to live there for the loan’s full term.
An adjustable-rate mortgage (ARM) is the opposite of a fixed-rate mortgage. An adjustable-rate mortgage is a 30-year loan with interest rates that change depending on the market rate.
When you sign onto an ARM, you first agree to an introductory period of fixed interest. Your introductory period is typically 5, 7 or 10 years and the fixed interest rate is usually lower than 30-year fixed rates.
When the introductory period ends, your interest rate changes depending on market interest rates. A predetermined index will be used by your lender to calculate how rates are changing. Your rate could increase if the index's market rates go up or could decrease if the market rate goes down.
Rate caps are included in your ARM to dictate how much your interest rate is allowed to change in a given period and over the lifetime of your loan. The rate cap works both ways; it will dictate the amount that your interest rate can increase or decrease.
If you plan on buying a starter home before purchasing your forever home, you can easily take advantage and save money if you don't plan to live in your home throughout the loan’s full term.
An ARM can also be beneficial if you plan on paying extra toward your loan early on. ARMs can give you some extra cash to put toward your principal. Paying extra on your loan early can save you thousands of dollars later on.
Advantages of an Adjustable-Rate Mortgage
- Gives lower interest rates for the initial introductory period.
Disadvantages of an Adjustable-Rate Mortgage
- If the rate increases, it can dramatically increase your monthly payments.
A government-backed loan is best suited for home buyers who don’t qualify for conventional loans or have low cash savings.
A government-backed loan is insured by government agencies. There are three types of government-backed loans: FHA, VA and USDA loans. This type of loan is less risky for lenders because the insuring government body will foot the bill in the event that you default on your mortgage. If you do not qualify for a conventional loan, you may qualify for a government-backed loan.
There are specific criteria you will need to meet in order to qualify for each loan specifically. There are unique benefits to each type of government-backed loan that may save you on interest or down payment requirements, depending on your eligibility.
An FHA loan is insured by the Federal Housing Administration. With a credit score as low as 580, an FHA loan may allow you to buy a home with a down payment of 3.5%. If you pay at least 10% down, and FHA loan may allow you to buy a home with a credit score as low as 500.
USDA loans are insured by the United States Department of Agriculture. A USDA loan can allow you to buy a home with no money down and has lower mortgage insurance requirements than FHA loans. In order to qualify for a USDA loan, you must meet income requirements and buy a home in a suburban or rural area.
VA loans are insured by the Department of Veterans Affairs. A VA loan offers lower interest rates than most other types of loans and may allow you to buy a home with $0 down. You must meet service requirements in the Armed Forces or National Guard to qualify for a VA loan.
Advantages of a Government-Backed Loan
- It is possible to save on interest and down payments, which could mean reduced closing costs.
- There are less strict qualification requirements than conventional loans.
Disadvantages of a Government-Backed Loan
- You must meet specific criteria to qualify.
- Many types of government-backed loans have insurance premiums (also called funding fees) that are required upfront, which can result in higher borrowing costs.