How to Choose the Right Type of Mortgage Loan for Your Needs

 

Getting a mortgage funds the American dream of homeownership, which for most families is the largest financial commitment they have ever made. Given the momentous, long-term impact of signing for property debt spanning 15-30 years, identifying your best-fitting loan upfront prevents unnecessary interest costs and strict constraints. 

 

Thankfully, more mortgage loan variety exists today than ever catering to wide ranging financial situations. Beyond vanilla 30-year fixed-rate products, customized loans help specific home buyer needs whether chasing ultra low interest costs, maximizing affordability to borrow more, or desiring flexibility to pay debt off quicker.

 

Read on for guidance around the mortgage industry’s most popular current loan options to inform the ideal selection aligned with your home buying goals and lifestyle:

30-Year Fixed Rate Mortgage Loans  

 

For almost a century, the predictable 30-year fixed rate mortgage has reigned supreme as the quintessential American home loan product because of stability and low initial monthly payments relative to loan amount. 

 

Here is how they work:

 

• Loan repayment term is 360 months (30 yrs)   
• Interest rate locks in and remains unchanged the entire term
• Monthly principal and interest payments don’t fluctuate
• Typically allows lower down payments like 3-5%   

Best Fit Borrower Profile

 

30-year fixed products appeal most to first-time home buyers or anyone prioritizing lower initial monthly carrying costs, payment stability, and smaller down payments over shorter repayment terms to build equity quicker. Setting payments lower than faster-amortizing mortgages allows qualifying for larger loan amounts. 

 

Just know that long repayment timeframes cause exponentially more interest paid over loan duration. But secondary financing, supplemental payments, or potential refinancing later always helps accelerate. 30-year mortgages offer flexibility if income grows over time.

15-Year Fixed Rate Mortgage Loans  

 

Functionally, 15-year fixed rate mortgages work identically to 30-year versions above – locked interest rates over 180 straight months with consistent principal and interest payments. The singular difference:

15-year home loans get paid off twice as quickly   

 

The accelerated repayment term benefits borrowers through:

 

• Less interest paid over full loan term  
• Faster equity buildup as more payment applies to principal 
• Usually features lower interest rates – saving money
• Forced extra mortgage principal payments – increases net worth   

 

Yes, the trade-off is 15-year money borrowed requires notably higher monthly payments relative to amount financed. However, recent historically low rates have lessened the blow. 

Best Fit Borrower Profile

 

Disciplined savers willing to pay more upfront in exchange for less interest fees long run are ideal 15-year mortgage candidates. Also favors higher household incomes exceeding expenses where dedicating larger sums to housing costs won’t break budgets.

Adjustable Rate Mortgages (ARMs)

 

Thus far we’ve only covered fixed rate mortgages with level interest and payments lasting decades. Enter adjustable rate mortgages…

 

Unlike fixed loans, ARM interest rates start artificially low introductory periods (teaser rates) then fluctuate up/down matching market rate indexes after an initial 5, 7, or 10-year period. Monthly payment amounts rise and fall accordingly.

 

• Offer very low starting interest rates  
• Rates adjust higher/lower over set intervals
• Monthly payments depend on current interest rate
• Typically used as shorter-term financing options  

 

Yes, rates that only move upward presents payment shock risk longer term. But home owners can refinance into fixed rate products down the road if desired before adjustments hit. Savvy borrowers with plans to sell or refinance within 5-7 years like to play the teaser rate game with ARMs averaging lower lifetime interest costs.

 

Best Fit Borrower Profile

 

ARM products appeal most to first-time home buyers trying to minimize initial housing payments at the expense of repayment term flexibility. Also rewards disciplined refinancers unwilling to overpay long-run interest happy to swap into fixed rate terms once income grows.

Jumbo Mortgage Loans  

 

Thus far we’ve covered conventional loans capped at limits set by Federal Housing Finance Agency each year linked to average regional home prices. For 2022, the baseline “conforming loan limit” caps at $647,200 for single family homes in most U.S. counties. 

Enter jumbo mortgages for luxury financing!

 

Jumbo home loans help borrowers requiring GIANT mortgages exceeding conforming caps finance pricier properties through:

  

• Loan amounts ranging $647,201+ (54102023 INR)  
• Interest rates running slightly higher  
• Usually requires 10-20% down payments
• No maximum loan amount cap  

 

Because jumbo home loans fall outside bounds of government programs, lenders perceive higher default risk attached to them – explaining the mildly higher rates. But significant asset/income documentation helps secure financing. 

Best Fit Borrower Profile

 

Well-qualified borrowers falling in love with luxury listings eclipsing $650k+ conforming limits turn to jumbo mortgages. Also favors borrowers sitting on substantial cash stockpiles to meet larger down payment requirements. 

VA Mortgage Loans

 

Among specialized mortgage options, Veterans Affairs loans stand out uniquely catering to U.S. military service members and families through:

  

• 100% financing with $0 down payments  
• No monthly mortgage insurance premiums 
• Lower minimum credit scores requirements 
• Ability to roll closing costs into loan amounts  

 

Designed specifically to thank active/former military members for national service via preferential home buying subsidies, VA loans really minimize cash needed upfront to purchase. This allows more flexibility shopping in competitive markets.

Best Fit Borrower Profile

 

Only military members meeting minimum length of service requirements qualify for $0 down VA home loan perks. But spouses or surviving partners also retain eligibility in certain cases. VA mortgages reward those who served with easier home financing terms.   

FHA Mortgage Loans

  

Similar to VA products, Federal Housing Administration insured mortgage loans assist first-time low/middle income home buyers lacking resources for large 3-5% minimum down payments required on conventional mortgages through:  

   

• Minimum down payments starting at 3.5%  
• Flexible credit score and debt requirements  
• Low mortgage insurance premiums    
• Options for gifting down payments from family 

 

FHA products make owning starter homes more affordable for wider swaths of buyers by lowering cash barriers. Government backing gives peace of mind to sellers and lenders as well.

Best Fit Borrower Profile

 

Buyers lacking resources for standard minimum down payments but meeting baseline income and credit expectations look to FHA loans for affordable low down financing. The loan product also allows gifting parts of down payments from family making ownership more achievable.

HELOC Mortgage Loans  

 

Thus far we’ve covered primarily loans for home purchasing scenarios. But homeowners can access financing too through home equity lines of credit (HELOCs) functioning like credit cards tied to existing property equity. HELOCs offer:

  

• Credit lines based on home values minus mortgage debt  
• Typically variable interest rates fluctuating over time   
• Interest-only payments during “draw” period  
• Added discipline repaying within set timeframe

 

HELOCs lend flexibility harnessing equity for anything from renovations to medical bills to college savings, etc. Just be cautious not using funds to overspend on depreciating assets delaying loan repayment.

Best Fit Borrower Profile

 

Disciplined homeowners seeking cheaper, more flexible financing for home renovations, emergency expenses, or big purchases prefer navigating the application/drawdown process with HELOCs to tap equity over more cumbersome cash-out mortgage refinancing. 

Finding the Right Mortgage Match

 

With so many mortgage varieties catering to specific financial situations these days, the search for finding your optimal match appears daunting. But simply reflecting on your honest answers to the key questions below helps narrow options:

 

• How long do you plan living in this home?  
• How much savings do you have for a down payment today?
• How much monthly debt load are you comfortable taking on?
• How stable is your long-term household income?
• How disciplined are you about budgeting and making extra payments?
• Do you qualify for any specialized military/first-time buyer programs?    

 

Weighing responses across loan types covered today – from low cash flow 30-year mortgages, to accelerated 15-year loans, to flexible ARMs and HELOCs, to $0 down VA products – reveals suitable solutions for most home shoppers. 

 

While newer customized mortgage options emerge constantly empowering different buyers, avoid overcomplicating choices. Stick with conventional, fixed rate products where possible for stability and affordable minimum payments. But leverage alternative programs where helpful as well balancing attributes aligned with your money situation.