How to Get The Best Mortgage Rate with Types Of Home Loans Explained
A new home is supposedly the most important and biggest investment in your entire life. Before you start looking for the choicest property to purchase, you will have to explore the myriad mortgage options when you will need finance for the investment.
In most cases, homeowners choose to pay the mortgage over a long span of time. Thus, it’s important to opt for a loan that suits your needs and budget. As you borrow money from a lending authority, you will come under the legal agreement to repaying the said amount within a stipulated span of time.
WHAT IS A MORTGAGE?
The two primary components of any mortgage comprise the principal or the loan amount, and the interest which is applicable to that amount. During the term of the mortgage, you will have to pay the monthly installments depending on the amortization schedule decided by your lender. Another deciding factor in a mortgage is the APR or the Annual Percentage Rate which is used to assess the total loan cost. APR is inclusive of the interest rate along with other loan fees.
WHAT ARE THE VARIOUS MORTGAGE OPTIONS?
Several types of mortgage options are available to suit your budget and lifestyle. While the 30-year option is the most popular, you can opt for the one which goes only for 10 years. These generally have a fixed rate of interest which doesn’t change through the tenure of the loan. If you are ready to accept some amount of risk, you can even choose a mortgage with an adjustable rate of interest. You can secure a very low-interest rate for some time, but it can also shoot up when the interest rate surges.
All mortgages are not created equally. Some of them come with very strict guidelines compared to others. For instance, some lenders may ask you for a 20 percent down payment while others would only ask for a mere 3 percent of the purchase price of your home. But one factor is constant in almost all mortgage options – a pristine credit.
While the US government doesn’t lend money directly, it guarantees some particular kinds of loans that cater to the strict eligibility criteria for loan limits, income, and geographical areas. Here are some popular mortgage options:
1. CONVENTIONAL MORTGAGE
Conventional home loans are those that aren’t supported by the federal government. Anyone with plausible credit, stable income, and employment history along with the ability to afford a 3 percent down payment. Fannie Mae and Freddie Mac are the two popular government-sponsored enterprises that purchase and sell most of the conventional mortgages running in the US.
To rule out the need for private mortgage insurance, you would typically need to make a 20 percent down payment. Some lenders also provide conventional home loans with reduced down payment requirements and without any additional private mortgage insurance.
2. CONFORMING MORTGAGE LOANS
Conforming home loans are bound by a maximum loan limit as directed by the federal government. These limitations generally vary from one place to another. The Federal Housing Finance Agency has determined the baseline loan limit at 647,200 USD for one-unit in 2022.
On the other hand, the Federal Housing Finance Agency has a higher limit on home loans in some parts of the country like San Francisco and New York. This is because the home prices in these areas are higher than the baseline loan limit by a whopping 115 percent at least.
3. NONCONFORMING MORTGAGE LOANS
The non-conforming loans are those whose buying and selling are not administered by Fannie Mae and Freddie Mac. This is because of the loan amount or its underlying regulations. The most common variant of a nonconforming mortgage loan is a jumbo loan. It gets its name from the fact that the loan amount generally exceeds the conforming loan limit.
It’s worth noting here that these loans carry more risks for the lender. Thus, borrowers are required to show an impressive cash reserve, sport strong credit, and go for a down payment of 20 percent or even more.
4. GOVERNMENT-INSURED LOANS
Those borrowers with low to medium income investing in a property for the first time generally go for home loans insured by the Federal Housing Administration as they fail to grab conventional loans. These loans do not have stringent requirements as conventional loans. FHA loans are given to borrowers even with a FICO score as less as 500 for a 10 percent down payment.
Another government-insured mortgage option is the Veterans Affairs loans which can be accessed by veterans, military service members, and their spouses. The best benefit of this mortgage loan is that borrowers can finance a cent percent of the loan amount without any down payment.
HOW TO GET THE BEST MORTGAGE RATE?
When looking to bag the best mortgage rate, a mortgage calculator is a great place to get started. This lets you have an estimate of the monthly house payments so that you have a better idea of how much you will be able to afford. And this helps in narrowing down your home search and going for the right mortgage option at the best rates.
But in order to secure the best mortgage rates, it’s imperative to have a great credit score. When it’s possible, you should attempt to boost your credit score before applying. Generally, a higher down payment qualifies the borrowers to bag a competitive interest rate since the lender will face lesser risk.
FINAL THOUGHTS
Unless you are opting to buy a home with your cash entirely, finding the property is just half the battle. The other, and perhaps more critical part is sifting through the various kinds of mortgages to land the best one. Regardless of the loan you select, you should check your credit report ahead of time to get a clear idea about where you stand financially. It would be wise to pursue finances before you seriously choose a property and start making offers. You need to act quickly and sellers would definitely prioritize you when you are armed with a preapproval letter in hand.