When you first start the home-buying process, you might be overwhelmed by the amount of information available. You can read all about the different types of mortgages, but how do you know which one is right for you? Let’s simplify it and make it easy for you.
To choose what type of mortgage is right for you, you need to consider a few factors, including your credit score, your downpayment, and your debt-to-income ratio. You should know where you stand with all three of these before looking into mortgages.
If you have a stable income, a credit score of 650 or higher, a debt-to-income ratio of 45 to 50 percent, and can afford to put a decent amount of money down on your new home, your best bet is a conventional loan.
Conventional loans generally have lower borrowing costs. If your downpayment is at least 20%, you also won’t be required to have private mortgage insurance (PMI).
If your credit is a little lower, or you can’t afford to put as much money down, you should consider an FHA loan. FHA loans are guaranteed by the federal government. You can have a downpayment as low as 3.5% with an FHA loan. These loans are especially popular with first-time homebuyers, although they are available to all homebuyers. You will have to pay PMI and will likely have higher borrowing costs.
If you are a veteran, you may be eligible to get a VA loan through the U.S. Department of Veterans Affairs. These loans allow you to buy a home with no money down. VA loans are provided by private mortgage lenders but are backed by the federal government, just like FHA loans, which is they have less required qualifications.
What Kind of Mortgage is Right for You?Fixed-Rate vs. Adjustable Rate
The other thing to consider when buying your home is whether you would like a fixed-rate or an adjustable-rate. Fixed-rates have interest rates that are the same from day one, while adjustable rates will go up and down. If you plan to stay in your home for seven years or more, you’re usually better off opting for a fixed-rate. If you plan to move in a few years, you can consider an adjustable rate.