Home Purchase Mortgages: Reviews & Comparisons
In all likelihood, your home is the biggest purchase you'll make in your lifetime. Most home buyers spend several decades paying off their home purchase mortgage. As such, it's crucial to find an affordable mortgage that won't hurt your quality of life.
What is a home purchase mortgage?
A home purchase mortgage is a loan that you use to finance the purchase of your home. Their loan terms typically span several decades, and they usually require some percentage of money down upfront. Depending on your lender, their interest rates may be fixed or variable, and you may have to pay for private mortgage insurance (PMI). Generally speaking, you'll need a good credit score to qualify for a mortgage loan.
What home purchase mortgage options are available to you?
There are several different types of home purchase mortgages. You can pursue a:
- Conventional (fixed-rate) mortgage loan.
- Government-insured mortgage.
- Adjustable rate mortgage (ARM).
- VA mortgage loan.
- Home Equity Line of Credit (HELOC).
- Home Equity Loan (HEL) .
Which mortgage type is right for you? Well, that depends on your circumstances. Let's dig a little deeper.
Which home purchase mortgage type is right for you?
To find the right type of mortgage, you must simply take a look at your current financial situation. Do you have stellar credit, or merely middling? Do you have a large savings that will allow you to afford a hefty down payment, or would you rather avoid upfront costs? Are you a (current or past) member of the U.S. armed forces? Do you already own equity in a property that you can borrow against?
The answers to these questions can guide you to the right loan.
Let's take a look at each of the above types of mortgage loan, and at what makes them advantageous and disadvantageous to different home buyers.
What is a conventional (fixed-rate) mortgage?
Do you have a credit score of 620 or higher, and a healthy savings that will allow you to afford a generous down payment? And is your debt-to-income ratio lower than 50%? If so, a conventional mortgage may be the right choice for you.
A conventional mortgage is a mortgage issued by a private lender, and not insured by the federal government. They typically have fixed interest rates, which means that your monthly payments will remain the same throughout the lifespan of the loan.
This mortgage type is an especially good option if you are able to afford to make a 20% down payment. If you can't, you'll have to pay private mortgage insurance (PMI) every month for the lifespan of your loan. This can seriously add to the total cost of the loan.
What is an adjustable rate mortgage (ARM)?
Are you looking to save more money overall, but you still have a healthy savings to fall back on if market rates surge upward? If so, an ARM could be right for you.
Unlike conventional mortgage loans, ARMs have interest rates that fluctuate with the market. In many cases, an ARM will have a fixed interest rate for a set period of time, and then switch to a variable rate for the rest of the loan term. If you pursue an ARM, look for one that has a cap on the interest rate -- otherwise, you may find yourself with a mortgage you can't afford.
What types of government-insured mortgages are there?
There are three types of government-insured mortgages: those insured by the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the U.S. Department of Veterans Affairs (VA).
What is an FHA mortgage loan?
Are you unable to afford a large down payment, and do you have less-than-stellar credit? If so, an FHA loan may be for you.
If you have a credit score of 580 or higher, you can get an FHA loan with a down payment as low as 3.5%. But you can still qualify for a loan with a credit score of 500 or higher -- you'll just have to pay at least 10% down.
What is a USDA mortgage loan?
If you make a low-to-moderate salary and live in a rural area, a USDA loan may be right for you. These loans are fairly low-cost, and often do not require any down payment at all. However, you must live in an eligible area to qualify.
What is a VA mortgage loan?
If you are (or once were) a member of the U.S. military, you should definitely investigate VA loans. They are flexible, charge very low interest rates, require neither a down payment nor PMI, and often comp your closing costs.
What is the difference between a Home Equity Line of Credit (HELOC) and a Home Equity Loan (HEL)?
Have you already purchased property? And do you own equity in that property? If so, a HELOC or HEL might secure you a lower interest rate than you could find from a conventional or federal loan.
HELOCs and HELs are secured by the equity you have in your home, and as such, offer very competitive interest rates. However, you can typically only borrow about 80% of the value of your property. As such, this option will be a good fit if your second property costs less than the one you presently own.
Also, choose this route with caution: if you fail to pay off your HEL or HELOC in time, you could lose your home.
How can you compare home purchase mortgages?
When comparing mortgages, consider the following factors:
What are the eligibility requirements for a home loan?
Are you eligible for a given mortgage loan? Is your credit score high enough? How about your debt-to-income ratio? Do you live in an area where that loan type is available? Can you afford to make a large enough down payment?
Not sure what you're eligible for? Compare lenders side-by-side and apply for pre-qualification to find out.
When comparing home loans, ask the following questions to make sure you are getting the best possible deal.
What are the interest rates?
Is the interest rate fixed or variable? Fixed rate mortgages protect buyers from sharp spikes in interest rates. On the other hand, adjustable rate mortgages can translate into significant savings when interest rates are falling.
If the interest rate is fixed, how high is it? Make sure that you'll be able to afford it along with any additional costs (e.g. PMI) every month for the next 20-30 years.
What are the loan terms offered?
How long is the loan term? In other words, how long will you be paying off the mortgage until your home is fully yours? A longer loan term means a lower monthly payment, but it also means losing more money overall.
With a shorter term, you'll save more overall and will own your property sooner. But you'll also have to make much higher monthly payments. And considering that even the shortest mortgage term spans several years, high monthly payments could hinder your quality of life for a long time.
What fees and costs will I be charged?
What is the origination fee of the loan? How about the closing costs? Will you have to pay PMI? Is there an application fee? Will you buy discount points to reduce the interest rate you'll pay? How about a broker fee? How high is the origination fee?
These costs can add up to seriously raise the total price of the loan, so make sure to ask about all fees before you commit to any lender.
What is the minimum down payment to qualify for a home loan?
With a conventional loan, you'll likely have to pay 20%; while a federal loan may charge you only 3.5%. Can you afford to make a large down payment to lower your costs down the road? Or would you rather minimize upfront costs?
What is the lenders customer service like?
You'll probably be paying off your mortgage for the next few decades of your life. As such, you need to know that you can trust the lender you'll be paying. If an error occurs and one of your monthly payments doesn't go through, will they work with you to fix it? Or will they just charge you a late payment fee and report the missed payment to the credit bureaus? Flexibility and accessibility are both crucial in a mortgage lender.
What do borrowers say about the lender in consumer reviews?
The best way to find out what to expect from a lender is to read unbiased reviews from past customers. Click on the lenders below and scroll to the bottom of the page to read what other borrowers have to say about the lender.
How do you get the best rates?
If you want low interest rates and attractive loan terms, the best thing you can do is shop around. Compare several different lenders against each other, and read reviews from their past customers. The more lenders you appraise, the likelier you are to find competitive rates and terms.
Loan Term (Years)
Credit Score Range