Planning to buy a house soon but don’t have enough money saved up? Finding the right mortgage might seem tough, especially if you’re new to the whole mortgage lending world. It can feel pretty overwhelming at first, but don’t worry. Since buying a home is likely to be the biggest purchase of your life and a mortgage is a major financial commitment, doing some homework beforehand is really important.
So, where do you start? There are a bunch of questions you’ll need answers to: How do you get the best interest rate? Do you need private mortgage insurance (PMI)? What happens if you don’t have a big down payment? And which type of mortgage is best for you?
Before diving into the real estate market, it’s crucial to understand the different mortgage options available to you. Having basic knowledge about these options can make your meeting with a loan officer much less stressful.
Here’s a quick guide to help you understand the essentials of mortgage lending:
TYPES OF MORTGAGES
There are generally two main categories of mortgages: conventional and government loans.
1. **Conventional Mortgages**: These are standard loans typically requiring a down payment as low as 3%, but to avoid PMI, a 20% down payment is needed. They offer great interest rates if you have a high credit score. Even if you pay PMI, it’s usually not very high and depends on the PMI company your lender uses.
2. **Government Loans**: These include FHA (Federal Housing Administration), VA (Veteran’s Administration), and USDA/RD (U.S. Department of Agriculture/Rural Development) loans. They come with government backing and can be good options if you can’t qualify for a conventional mortgage.
– **VA Loans**: Ideal for veterans and their surviving spouses. You can finance the entire purchase price without needing a down payment, which is great if you don’t have a lot of upfront cash.
– **USDA/RD Loans**: Suitable if you aren’t a veteran but don’t have a down payment. The property must be in rural areas, but these loans are backed by the government and have their benefits.
– **FHA Loans**: These used to be popular among those with lower down payments and credit scores, as you can get started with as little as a 3.5% down payment. However, they now come with higher monthly mortgage insurance fees, making them less attractive.
FIXED RATE VS. ADJUSTABLE RATE
After you’ve figured out which mortgage type suits you best, you’ll need to decide between a fixed-rate mortgage or an adjustable-rate mortgage (ARM).
– **Adjustable-Rate Mortgages (ARMs)**: These can be risky since the rate can change over time. You might end up needing to sell the house, refinance, or pay it off early, none of which are certain or easy options.
– **Fixed-Rate Mortgages**: These are a safer and more common choice. The interest rate stays the same throughout the entire loan period, so your payments are predictable.
CHOOSING THE RIGHT MORTGAGE FOR YOU
Your choice will largely depend on your credit score and how much you can put down as a down payment. If you have good credit and a 3% down payment, a conventional mortgage is usually the most cost-effective option. For those with less-than-perfect credit or limited funds for a down payment, VA or USDA loans might be better. If all else fails, consider an FHA loan.
Once you’ve decided on the right loan type for your situation, schedule a meeting with a loan officer to get pre-qualified and have your credit checked. Going in with a clear idea of what you want shows you’re prepared. After you get the approval, you can start looking for a Realtor, and that’s when the real fun begins.
Good luck on your journey to finding your dream home!