Understanding Mortgage Options

When evaluating various mortgage options — and even similar mortgages offered by multiple lenders — it’s important to know which characteristics of a mortgage have the greatest impact on the value a specific mortgage offers you as the homebuyer.

Top criteria to consider when comparing mortgage options include:

Interest Rate

Your mortgage APR determines how much you’ll pay over the life of the loan. The higher the rate, the higher your monthly mortgage payment. Lower rates, which are determined by your credit score, market conditions and other factors, lock in value for the life of the loan. Given the long-term cost, interest rates are a top consideration when evaluating mortgages.

Income Requirement

Your income will determine how large of a mortgage you’re able to qualify for. A lender will consider your income alongside your fixed expenses and other factors to set a limit on your borrowing.

Minimum Down Payment

Certain lenders and subsidized loan programs will have minimum requirements for the amount of money you have to put down on a home. The size of your down payment may also affect your interest rate and/or whether you need to pay for private mortgage insurance.

Repayment Term

Your repayment term affects your interest rate, your monthly payment and how quickly you build equity in your home. While 15  and 30-year repayment terms are the most common term lengths, other repayment terms may also be an option.

Points

Points are an upfront fee you can pay to a lender in exchange for a reduced interest rate. While this increases the cost of your loan in the short term, it can lead to savings in the future.

Closing Costs and Other Fees

Any home purchase or sale will come with closing costs and fees that need to be paid. Payment of these costs can be negotiated during the purchase process, but buyers should be accounting for these costs when budgeting for a home purchase.

Private Mortgage Insurance (PMI) Requirements

Typically, PMI is required when your down payment is less than 20% of the purchase price. The process of removing PMI from your mortgage can vary in complexity depending on your loan program, the future market value of your home and how much of your home you’ve paid off when you try to remove PMI.

Before you know the amount you’re able to afford for a home, you need to identify the mortgage product or products that meet your financing needs and preferences.

You also need to make sure you meet the eligibility requirements of these home loan programs before you go shopping on the housing market. Here’s a look at the common home loan products you might want to consider.

Fixed-Rate Mortgages

Fixed-rate mortgages are the most common type of conventional mortgage loan. Buyers are offered a fixed APR that will carry through the life of the mortgage.

• Pros: A simple, structured, locked-in interest rate
• Cons: If rates go down in the future, you may be locked in to paying more than the current market rate
• Best for: Buyers who don’t want to worry about their APR changing in the future, buyers who don’t need the assistance of a subsidized loan program

Federal Housing Administration (FHA) Home Loans

The Federal Housing Administration offers subsidized loans to first-time homebuyers, making it easier to purchase a home on a limited income and for those with limited means for affording a down payment.

• Pros: Modest down payment requirements and competitive borrowing rates; some homebuyers may have an easier time qualifying for this type of loan
• Cons: FHA loans carry more requirements when approving a home purchase to be financed with this loan
• Best for: First-time buyers who meet the income requirements and are shopping for houses within the program’s budget limits

Veterans Administration (VA) Home Loans

The VA offers a home loan program specifically for veterans and military families. This low-cost program can beat the loan offerings from almost any other lender.

• Pros: Low or no down payment requirement, competitive rates, no prepayment penalty
• Cons: Must be a military veteran or meet other strict requirements to qualify for a VA loan
• Best for: Military veterans and active service members who meet the program’s eligibility requirements

First-Time Homebuyer Program

Local first-time homebuyer programs are designed to offer down payment assistance and other benefits for buyers who meet all other requirements for qualifying for a mortgage.

• Pros: Can work with multiple types of mortgages, including conventional, FHA or VA loans; can be used to facilitate owner-occupied purchases
• Cons: Down payment assistance isn’t guaranteed or available in all areas 
• Best for: First-time homeowners seeking assistance in affording their down payment or other aspects of their home purchase

Construction Loan

Prefer to build your own rather than buy? Construction loans can help fund the construction of the home of your dreams.

• Pros: Can be used to finance the construction of a new home; small down payment required for many borrowers
• Cons: May carry more requirements and restrictions than financing the construction out of pocket
• Best for: Buyers who need financial assistance to build their custom home

Rehab-Renovation Mortgage

Buyers considering a home restoration or rehab project may benefit from forgoing conventional loan options in favor of a rehab-renovation mortgage.

• Pros: Provides fixed-rate financing for properties that require extensive renovations
• Cons: Borrowing and repayment restrictions may not be flexible enough for all rehab and renovation projects
• Best for: Buyers considering properties that require extensive renovations and/or repairs

Home Loan Refinancing

Refinancing can offer a number of benefits to existing homeowners. In many cases, the refinancing process is simpler than an outright home purchase, and it can create new financial flexibility or opportunity for existing owners.

• Pros: Can help you access equity in your home, lower your interest rate and/or adjust your mortgage payment and repayment period
• Cons: The cost of refinancing can be cost-prohibitive depending on how much you’re able to save on interest; refinancing can be contingent on your home value and other factors

Best for: Current homeowners looking to access home equity, improve mortgage terms and/or consolidate debt

There’s no perfect mortgage for every type of borrower. Fortunately, homeowners can search through many different loan programs and loan types to find a mortgage that best suits their needs.

When choosing the mortgage to finance your home purchase, you need to consider a number of factors, including eligibility, short-term costs and long-term financial implications. Shop around, compare interest rates and other costs, and consider how each mortgage serves both your current borrowing needs and your long-term plans for the home you’re planning to purchase.

Whether you’re struggling to sort your mortgage options, or you’re ready to prequalify and see what sort of APR and shopping budget you qualify for, your local credit union can be a valuable resource in your home search process. Our homebuying resources and mortgage options can help you turn your homeownership dreams into a reality.