Which Home Loan Is Best For You?

Which Home Loan Is Best For You?

Fixed or adjustable?

Conventional or FHA?

Fifteen-year or 30-year?

If you’ve been thinking about buying a home, these questions might have crossed your mind. No need to be overwhelmed, though – buying a home can be a pleasant experience when you’re familiar with the types of loans that are available.

“Knowing the basics prior to meeting with a loan officer gives you a head start and will give you more confidence as you begin the home-buying process,” says Alan LaFollette, Vice President, Home Lending at FNBO.

Below, we provide an overview to the different types of home loans that are available.

Fixed vs. Adjustable
One of the initial considerations when applying for a home loan is whether or not you want an interest rate, and subsequently an average percentage rate (APR), that is fixed during the term of the loan, or adjustable during that period.

The interest rate is the cost of borrowing the loan amount, which is expressed as a percentage. An APR is a broader measure of the cost of a home loan because it includes the interest rate plus other costs, such as broker fees and some closing costs, expressed as a percentage. This all falls under a legal agreement, known as a mortgage.

A fixed-rate mortgage is the most common home loan. As the name suggests, the interest rate for a fixed-rate mortgage remains the same for the term of the loan, which is most often for 30 years (more length of loans below).

With an adjustable-rate mortgage (ARM), the loan and comes with lower rates and lower payments, initially, which might allow a borrower to buy a larger home that they otherwise might not be able to buy.

“Many ARMs will start at a lower interest rate than fixed-rate mortgage,” says the Consumer Financial Protection Bureau.¹ “This initial rate may stay the same for months, one year, or a few years. When this introductory period is over, your interest rate will change.”

That means the interest rate could go up or down.

“One of the advantages of the fixed-rate mortgage,” says FNBO’s LaFollette, “is that it remains constant despite what may be happening in the broader economy. That stability makes budgeting easier.”

Conventional home loan
Conventional loans are offered by private entities such as banks, credit unions, private lenders or savings institutions. They are more difficult to qualify for, compared to VA and FHA loans.

To take out a loan for a conventional mortgage, borrowers need:

• Good credit (minimum scores vary from lender to lender)
• A steady income (a good debt-to-income ratio)
• To be able to afford a down payment, a percentage that usually ranges between 5 and 20 percent. (If a borrower puts less than 20 percent down, they will likely need to get private mortgage insurance (PMI), so that if the borrower defaults on the loan, the mortgage insurance company makes sure the lender is paid in full.)

“A conventional mortgage is a home loan that isn’t guaranteed or insured by the federal government and conforms to the loan limits set forth by Freddie Mac and Fannie Mae. You can get a conventional loan at a fixed or adjustable rate,” says nerdwallet.com.²

FHA home loan
Borrowers with lower credit scores and who may not be able to make a significant down payment often choose an FHA (Federal Housing Administration) loan. The loan is insured by the FHA, which protects lenders from financial risk.

“An FHA loan can be a good choice for younger, first-time homebuyers who have not had time to save up for a large down payment,” says LaFollette.

Borrowers with lower credit scores, or who might have experienced bankruptcy, may also qualify for an FHA loan. FHA loans require a funding fee, which includes a monthly insurance premium and may have a higher interest rate than a conventional loan to compensate for the smaller down payment.

VA home loan
A VA home loan is one that is guaranteed by the Veterans Administration through VA-approved lenders. The guarantee means that the lender is protected against loss if the borrower fails to repay.

According to the Veterans United Home Loans³, you may be eligible for a VA loan if you:

• You have served 90 consecutive days of active service during wartime.
• You have served 181 days of active service during peacetime.
• You have more than 6 years of service in the National Guard or Reserves.
• You are the spouse of a service member who has died in the line of duty or as a result of a service-related disability.

15-year vs. 30-year mortgages
The majority of homeowners – especially first-time homebuyers – choose a traditional 30-year mortgage. It means that your home loan payments are stretched out over 30 years, or 360 payments. A 30-year mortgage typically has a higher interest rate, but the monthly payments for a 30-year mortgage are significantly lower than they are for a 15-year mortgage.

“The loans are structurally similar – the main difference is the term of years. A shorter-term loan means a higher monthly payment, which makes the 15-year mortgage seem less affordable,” says investopedia.com.⁴

“We work with home-buyers to determine which home loan is best for them, and we’re there every step of the process to make sure all their questions are answered,” says LaFollette. “Buying a home is one of the largest financial decisions most people make, but it doesn’t have to be intimidating. We make sure it isn’t.”

Got Questions? Stop by your local FNBO branch today and visit with a mortgage loan expert.

Find a Mortgage Loan Officer

¹ “What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?” – https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-fixed-rate-and-adjustable-rate-mortgage-arm-loan-en-100/

² “What is a conventional mortgage?” – https://www.nerdwallet.com/blog/mortgages/finding-the-right-mortgage/conventional-mortgage/

³ “VA Loan Eligibility Requirements” –  https://www.veteransunited.com/va-loans/va-home-loan-eligibility/

⁴ “The 30-year and 15-year mortgages: A comparison” – https://www.investopedia.com/articles/personal-finance/042015/comparison-30year-vs-15year-mortgage.asp