Money

How to Choose the Best Mortgage Loan

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Buying a home is a significant financial decision, and the effort you've put into purchasing the right home is just part of your home-buying story. Typically, buying a home also requires purchasing a mortgage loan, and there are several different types of mortgages to consider.

But which is best for you? Read on for help determining the better mortgage loan option for your situation. 

The basic makeup of a home mortgage

A mortgage loan allows people to purchase a home they otherwise couldn't afford with cash. But this can come at a price, in the form of interest. Every type of mortgage is comprised of two main components: principal and interest. 

The principal is the amount of money you're borrowing from the lender. If your home's purchase price is $500,000 and you have $50,000 as a down payment, you need to borrow $450,000 for your loan. 

That $450,000 is your principal. For it to make financial sense for the lender to let you borrow the money, they charge interest on the loan — a percentage of the principal. Your monthly payments are a combination of both principal and interest over the life of your loan.

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Understanding fixed-rate vs. adjustable-rate mortgages

A fixed-rate mortgage locks you into an interest rate for the life of the mortgage. It never changes, meaning your monthly payment stays the same. This is a highly stable option for a family looking to remain in the home for a solid stretch of time. 

An adjustable-rate mortgage, known as an ARM, has more volatility, as the interest rate can slide higher or lower depending on the current market. ARMs often recalculate on set schedules, so if you can lock in a low first-rate and either plan to move before the adjustment period or can handle a jump in interest rate payments, an ARM may be an option for you. 

How long should my mortgage term be?

When borrowing money, the longer the payback term, the more you can spread out the cost and lower the monthly payment. However, this means you'll pay more money in the long run. Common term lengths run from 10 to 30 years. If you borrow $450,000 over a 30-year term, you'll have a more manageable monthly payment than a 15-year term but spend substantially more in interest over the life of the loan. Typically, homebuyers want to choose a term length as short as they can manage with the monthly payment. 

A conventional home mortgage

There are two types of conventional loans: conforming and non-conforming. 

• A conforming conventional home loan is one of the most straightforward loans available. Conforming to the Federal Housing Finance Agency's standards on credit and debt, a conforming loan typically gets selected by someone with a strong credit score, a down payment, a solid debt-to-income ratio, and who isn't considered a risk for the lender. Total loan amounts must also fall into the annually adjusted FHFA standards. 

• A non-conforming conventional loan doesn't meet those same FHFA standards, either because of a past financial issue or a larger purchase price on the property than the standards allow (also known as a jumbo loan). A non-conforming loan also can't be bought and sold by Fannie Mae and Freddie Mac, government-backed programs that buy and sell mortgages. Thus they'll often require a larger down payment from the borrower. 

Government-insured home loan options

The U.S. Government doesn't typically loan money for home mortgages, but it ensures them through various programs, each designed to help prospective home buyers get into the home of their choice more easily. The three agencies with a mortgage program include the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA). 

  • FHA loans: Designed to help homebuyers without a hefty down payment or a long credit history, FHA loans have traditionally helped new or young homeowners get into their first home. Having the FHA back the loan gives lenders more security in offering a mortgage. The government requires mortgage insurance premiums based on the down payment percentage. 
  • USDA loans: To assist homeowners in more rural areas, a USDA loan may be available for lower-income individuals looking to purchase a home in a USDA-eligible area. There are fees associated with the loan, but the USDA option doesn't have a high down payment requirement. 
  • VA loans: Both active-duty U.S. military and U.S. military veterans quality for VA loans, often a low-interest option without a large down payment requirement. The VA loan does have a fee, but it doesn't require mortgage insurance and has other benefits that can help keep closing costs to a minimum. The VA loan is also open to families of military members. 

Look at the fees and closing costs

When shopping for your mortgage options, you'll have plenty to look at with interest rates, term length, down payment minimum requirements, and mortgage insurance requirements. But you should also look at any fees and closing costs associated with the loan and work those into your calculations. 

How life insurance helps protect your mortgage

If you're responsible for paying your family's mortgage, having life insurance can provide solid protection for your family in the event of your passing. Having sufficient life insurance to help cover the remaining balance on your mortgage, along with lost wages, other debts, and education expenses is a wise plan. It ensures that even if your family loses you and, therefore, your income, they don't have to lose their home, too. 

Explore how life insurance term life policies can help protect your family home.

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