Key Takeaways

• Mortgages have three features, in general: the loan type, the term and the rate.
• Qualification factors like credit score and debt-to-income ratio can impact your options.
• Understanding total home costs helps you choose a loan that fits your budget.

Choosing a home loan is one of the most important steps in the homebuying process. With multiple mortgage loan types available, it’s important to understand how each option works before making a decision.

Mortgage features vary in several important ways. To help you consider all the variables before you decide, we’ve broken down home loan types, terms and rates below.

Mortgage Loan Types

There are several mortgage loan types to consider, each with different requirements and benefits.

1. Conventional Loan

Conventional mortgages are by far the most common. They require a strong credit score, a low debt-to-income ratio (the percentage of your monthly income that goes toward debt payments), and a down payment of at least 3%.

A conventional mortgage can be either conforming or nonconforming, which affects how it’s structured and priced (conforming loans usually have lower rates).

Conforming loans: Many financial institutions sell mortgages after they originate them. These loans must meet standards set by Fannie Mae and Freddie Mac, which are the government agencies that purchase mortgages.

Requirements typically include:

• A credit score of at least 620 to 660
• A 3% (minimum) down payment
• A debt-to-income ratio below 45% to 50%

Nonconforming loans: Because these loans don’t meet standards set for conforming loans, they are not purchased by Fannie Mae and Freddie Mac. Nonconforming loans tend to have higher interest rates.

2. Government-Insured Mortgage Loans

Mortgage lenders may also offer loans insured by government agencies. These loans feature lower down payments and lower credit scores to qualify. They include:

• FHA loans
• USDA loans
• VA loans

A government-insured mortgage can be a great option if your credit score and/or down payment are lower than what’s required for a conventional loan. You’ll need to meet the qualification requirements for the program.

3. Special Loan Programs

Local and state government agencies may offer mortgage loan programs for first-time homebuyers, or buyers in low- to middle-income brackets. Requirements and features of these loans vary.

Mortgage Loan Terms

Your loan term is the length of time you have to repay your home loan, typically 15 or 30 years. This choice impacts both your monthly payment and total interest paid.

• 15-year term: Since your total loan is divided over a shorter time, 15-year mortgage payments are higher than 30-year payments. Usually, interest on a 15-year mortgage is lower, so you pay less in total over the term of your loan.

• 30-year term: Interest on a 30-year mortgage is higher than the 15-year version, but monthly payments are less based on the longer term. You pay more in total over the term of this loan, but the lower monthly payment could make a home purchase affordable.

Mortgage Interest Rates

Mortgage loans come with one of two types of interest rates:

• Fixed-rate mortgage: Your interest rate and monthly payment stay the same for the life of the loan
• Adjustable-rate mortgage: Your rate is fixed for an initial period, then adjusts over time based on market conditions

Your timing can help you choose the best type of rate. If you plan to stay in your home for a long time, a fixed-rate mortgage may be the best choice, with lower costs over time. Conversely, if you don’t plan on many years in the house you’re buying, choosing a (usually lower) adjustable-rate mortgage will save money if you move before the rate increases.

Total Home Costs

When comparing mortgage loan types, it’s important to look beyond the monthly payment and consider total costs, including:

• Mortgage insurance, if required
• Property taxes
• Homeowners insurance
• Homeowners association (HOA) fees, if applicable
• Closing costs

Understanding the full cost of a home loan can help you choose an option that fits your budget both now and in the future.

As you explore your options, a mortgage calculator can be a helpful tool to estimate monthly payments and total costs. When you’re ready, connect with a Lake City Bank mortgage expert to discuss available options and find a solution that works for you.