Evaluating the Pros and Cons of Different Mortgage Options

by | BiggerPockets.com

When it comes to buying house, you need to think about more than floor plans, square footage, and school districts. From a financial perspective, you have to consider important topics like loans and mortgages. If you’re a first-time or inexperienced homebuyer, do you know your options?

Understanding Your Home Mortgage Options

The finance/mortgage industry really isn’t very different from other industries. Take the jewelry industry as an example. When you go shopping for a ring, you typically visit a couple of different stores and look through the display case at different options. You might even pick up a couple and take a closer look. While you can’t physically hold a mortgage, it’s still a product.

“When it comes to loan options, there are a ton, with each appealing to different types of buyers—some for those without sparkling credit, others for those who live in small or rural areas,” OnQFinancial explains. “No matter your situation, there’s a mortgage type that fits.”



Related: 3 Reasons to Consider NOT Paying Off Your Mortgage

In the process of shopping for a mortgage, you’ll want to know a little bit more about the different mortgage types that exist.

Let’s examine four basic categories:

1. Fixed-Rate Loans

The most common and predictable type of loan is a fixed-rate loan. As the name suggests, the interest rate on this type of loan is “fixed” for the duration of the loan. This means it can’t change, regardless of how interest rates fluctuate over time. Most fixed-rate loans come with 10-year, 15-year, and 30-year options (with interest rates stepping up accordingly).

2. Adjustable-Rate Loans

Whereas fixed-rate loans stay the same until the loan is completed or refinanced, an adjustable-rate mortgage (ARM) actually changes over time. The most common types of ARM loans are 3/1 ARM, 5/1 ARM, and 7/1 ARM. Depending on the type you select, this means your interest rate is set for 3, 5, or 7 years and then adjusts annually for the remaining portion of the loan. The benefit is a lower interest rate on the front end. The negative is that you don’t get the chance to lock in a good rate for very long.

3. Government-Backed Loans

While most people get conventional loans—such as the ones discussed in the previous two sections—there are also government-backed loans. The name is pretty self-explanatory, but some of the most common types of government-backed mortgages are federal housing administration (FHA) loans and veterans administration (VA) loans.

These types of loans are nice, but they aren’t as beneficial as they may appear at first glance. Sure, they feature low or non-existent down payments and have fewer requirements for qualification, but they also tend to feature high interest rates and poor terms over the life of the loan.

4. Jumbo Loans

Finally, you have jumbo loans. Also known as a nonconforming loan, a jumbo loan is a loan that doesn’t meet the guidelines laid out by Freddie Mac and Fannie Mae regarding credit, income, and asset requirements. These types of loans require a lengthy qualification process, but allow certain buyers to take on much larger loans if they’re able to put down a significant down payment.



Related: 3 Reasons to Consider NOT Paying Off Your Mortgage

Pursue the Options That Make Sense for You

The mortgage that makes sense for your neighbor won’t be the same mortgage that works for you, and vice versa. As you evaluate different loan products, it’s imperative that you think about the situational factors involved and make a choice that reflects your needs, priorities, and limitations.

The bank will tell you if there are certain loans you don’t qualify for; however, it’s up to you to decide whether or not you’ll pursue a loan that you’re “qualified” for.

Questions? Comments?

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About Author

Larry Alton

Larry Alton is a professional blogger, writer and researcher who contributes to online media outlets and news sources. A graduate of Des Moines University, he still lives in Iowa as a full-time freelance writer and avid news hound. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing.

2 Comments

  1. Cindy Larsen

    Nice article Larry. I particularly like your advice to shop for your loan. It is also important to keep shopping after you select a typle of loan, because different lenders offer different loan terms.
    Loan origination fees vary widely, from a few hundred dollars up to thousands of dollars on the same loan amount and same type of loan. Also some lenders offer a better combination of interest rate and points than others. For the same loan amount, you may be able to get a 0.25% reduction in the interest rate from a different lender, while paying them the same points as you’d pay another lender. This can result in tens of thousands of dollars saved over the life of the loan. originating loans is a competitive business: negotiate with lenders before selecting one.

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