Popular Types of Mortgages That Can Help You Buy Your Next Home

Last updated on February 27th, 2020

If you’re a first-time buyer, or if you haven’t purchased a home in the last five to 10 years, it helps to understand what’s popular types of mortgages are currently available. Two popular types of mortgages are Federal Housing Administration (FHA) loans and conventional loans. And both of these are available with either adjustable or fixed interest rates. As you research your options, you can use a mortgage lending worksheet, which lists out the details of each loan for comparative purposes.

 

FHA Loans Assist First-Timer Buyers

FHA loans were developed to help first-time buyers and others with lower credit scores who would not typically meet the stricter standards of conventional mortgage loans. To qualify for an FHA loan, you still need to meet certain guidelines, including a minimum credit score of at least 500 and a 10 percent down payment. Borrowers with down payments as low as 3.5 percent may also be approved for an FHA loan if their credit score is above 580. All FHA loans charge a Mortgage Insurance Premium (MIP), which covers losses to the lender in the event of a default on the loan. If you’re interested in learning more about FHA loans, you can reach out to an approved lender.

Addison Pond, Hollister model in Holly Springs, NC

 

Conventional Loans Can Cost Less

Conventional loans are issued by private lenders and are not a part of a specific government program like FHA loans. According to the Consumer Financial Protection Bureau, conventional loans have higher qualifying standards than an FHA loan, but also cost less. Conventional loan borrowers with a down payment over 20 percent will not need to purchase private mortgage insurance (PMI).

Toll Brothers at Rolling Hills Country Club, Sunningdale model in Rolling Hills Estates, CA

 

Conventional mortgage loans may be further labeled as conforming or non-conforming, based on their size. According to the Federal Housing Finance Agency, conforming loan limits are $484,350 for most of the U.S., with some high-cost real estate counties such as San Francisco having a larger limit of $726,525. If your mortgage is above the limit, you may not receive the same terms for your loan as you would for a conforming loan.

 

Adjustable vs. Fixed Rates

When choosing between types of mortgages—whether FHA or conventional—you’ll need to become familiar with the current interest rates that are offered and make sure you’re getting the rate that best fits your needs. The lowest rate, known as the prime rate, is typically offered to customers with the best credit. Mortgage lenders have generally set criteria defining who qualifies for prime mortgage rates. Additionally, you’ll need to decide between an adjustable or fixed rate loan. In a relatively low-interest rate environment, fixed rate mortgages are popular, but there are reasons to consider adjustable rates as well.

Toll Brothers at Whitewing, Weston model in Gilbert, AZ

 

Adjustable Rates: To Account for Flexibility

Adjustable rate mortgages offer payments that fluctuate with interest rates. These loans typically begin with an introductory period of lower payments where the rate stays the same for a period of one, three, or five years. After the introductory period, the rate will reset on a regular basis, such as once per year. These types of mortgages may also offer caps to adjustments to prevent rates from going too high or too low.

Even with the challenge of budgeting for a mortgage payment that could change in the future, there are situations where adjustable rates may be a good fit. Initially, adjustable rate mortgage payments may be lower than the payment for a comparable fixed rate mortgage. So, if you plan to sell your home and move again in the near future, an adjustable rate mortgage with a lower payment in the first few years may make sense. Or, if you plan to refinance your mortgage loan because you expect your income to increase after a promotion, new job, or annual bonus payment, you may be more comfortable with the possibility of increasing payments in the future.

Fixed Rates: To Fit Your Budget

Fixed rate mortgages offer a steady repayment stream that makes it easy to budget around your mortgage payment. In a low-interest rate environment, fixed rates are often the best option because adjustable rate mortgage payments could trend upward as their underlying indexes begin to rise.

With either a fixed or adjustable rate loan, it’s a good idea to ask lenders what they’re looking for in terms of credit criteria, income, and down payment to qualify for their best mortgage rates. You may decide to increase your down payment or take action to pay off other debt to strengthen your application and get the best rates offered.

A Payment Comparison

An amortization schedule or mortgage calculator can illustrate the difference between adjustable and fixed rate loans. For borrowers with a $750,000 mortgage with a 30-year term, at current fixed rates of about 3.875 percent, supplied by Bankrate, the monthly payment is estimated to be $4,885. With the current introductory rate of 3.375 percent for a 5/1 Arm (where the rate stays the same for five years and then resets annually) the monthly payment would be $4,674. This lower payment may or may not continue after the initial five-year period.

 

Term Considerations for Different Types of Mortgages

As with any long-term financial decision, there are many factors that come into play when choosing a mortgage. In addition to interest rates, how long you choose to repay the loan will affect the monthly payment. The most common terms are 15 or 30 years, but loans can span different time periods. Paying a home off faster means a higher payment over a shorter amount of time, but you’ll also build equity faster and pay less in interest.

Although you may be able to afford to pay off a home quickly, you may wish to carry a mortgage for a longer term, based on your personal financial or tax position. If you itemize deductions on your personal tax return, the IRS allows you to deduct mortgage interest for loans up to $750,000 as long as the proceeds of the loan are used to buy, build, or substantially improve your home.

Financing your primary home at a lower rate over a longer period of time frees up additional funds in your budget to use for home renovations, or even to purchase a second home. With a lower mortgage payment, you’re free to use more of your personal income for other expenses such as a new car, home furnishings, or extended vacations if you like to travel with your family.

Kirkland Crest, Ballard model in Kirkland, WA

 

With so much information on mortgage rates and terms now available online and through your lender, it’s easier than ever to take the mystery out of the approval process and find a loan that matches your long-term financial and personal goals. Running numbers through an online mortgage calculator can show the difference in payments when comparing fixed and adjustable options. And if you have specific questions about types of mortgages, TBI Mortgage can provide additional information on loans that are being offered in your area.

Jennifer A. DiGiovanni

written by

Jennifer DiGiovanni is a freelance writer, an author, and a small business owner. She previously worked in the financial services industry and has attained an MBA from Villanova University. Jennifer enjoys writing about real estate, business, home improvement and personal finance. She resides in the suburbs of Philadelphia, PA.

  • 8 Comments

    1. Avatar Barbara Lannin says:

      We want a house rent to Own house by June first please help us get into a house with a big backyard for my two dog’s to run and with a swimming pool in the backyard as well.

      • Toll Brothers Toll Brothers says:

        Hi Barbara, what location are you considering? Once we know of your desired state/city, we’re more than happy to supply you with quick-delivery homes that fit your criteria and are within the area. Thanks!

    2. Avatar Elyjah Paisley says:

      I’m looking for a new house to move into either by July or August… Please contact me asap

      • Toll Brothers Toll Brothers says:

        Hi, Elyjah. Thank you, for your interest in working with us. Can you please provide us with more information such as locations (cities and states), home types, and a price range that interest you, so we can help you find a Toll community and model that best suits you!

    3. Avatar Eleanor Hicks says:

      Good Afternoon,
      I’m a first time buyer, and I’m looking for purchase price @ 300,000.00. I currently would like NC. Can you assist?

      • Toll Brothers Toll Brothers says:

        Hi Eleanor, We are thrilled that you would like to build with us. Your first home is always special, and we would love to be the ones that build it for you. Here is a list of communities in NC that are offering homes around your purchase price – https://bit.ly/3gnF6pK

        Please take a look and explore our award-winning home designs. If you come across a model you like, there is contact information for our sales team on every model page. We hope this helps!

    4. Avatar Alfanette Mays says:

      I recently moved to Colorado from California because most homes in my price range was so close to each other you could see into their bathrooms. I moved to have about an acre of land. Do you have any homes that are not so close together? I’ve always dreamed of living in a Toll brothers home, and I am a first time home buyer.

      • Toll Brothers Toll Brothers says:

        Hi Alfanette, we appreciate your interest in our homes! We encourage you to visit our website and use our filters to narrow down Colorado communities to the ones that suit your criteria. You can do so here – https://bit.ly/33jgHNJ

        From there, please feel free to reach out to our online sales teams, which are found on each model page, for more information about the home design and community. Thanks!

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