How To Determine Which Mortgage Loan is Right For You

If you prepare all the necessary paperwork in advance, obtaining a mortgage can be pretty simple in theory: get a loan, use it to buy a house and pay it off over time with interest.

There are certainly many home loan programs that don't get much more complicated than that. Having said that, there is no one-size-fits-all solution in the mortgage process. After all, certain loans trade complexity for utility, and vice-versa. Know your home loan options and compare different mortgage types to find the absolute perfect fit for your needs and budget.

As explained in a guide from Zillow, mortgages are categorized according to three basic attributes :

• How principle and interest payments are structured.
• The type of institution that owns the loan.
• The total value of the loan.

Interest rates: Fixed vs. adjustable

Interest - the cost of borrowing money - is the most significant expense involved in any mortgage other than the dollar amount borrowed initially. That's why a major differentiator between various types of loans concerns how they structure those interest payments. As far as interest goes, most mortgages fall under one of two categories:

Fixed-rate

This is by far the most common way mortgages are structured in the U.S. today. The 30-year fixed-rate mortgage has long been considered the standard home loan, but they can also come with 15-year terms or less. Payments plus interest are divided by this term length to give a monthly bill paid by the homeowner each year. Fixed- rate mortgages are popular because they are simple - borrowers know exactly what they will owe each month no matter what. They are also among the most affordable compared to other options if the borrower can lock in a low rate at the right time.

Adjustable-rate (ARM)

These loans are less common, but comprise most of the rest of the mortgages originated in the U.S. that aren't fixed-rate. As the name implies, the interest rate on these loans may vary depending on the contract. One common subset of these is known as a 5/1 ARM. Under this arrangement, for the first five years, borrowers pay off their balance at an "introductory rate," often lower than fixed-rate loans would offer at the time. Starting on the sixth year and for every year until the balance is fully repaid, the interest rate changes once per year. The rate may go higher or lower from year to year depending on market conditions. This rate is usually tied to the yield of a standard financial asset like U.S. Treasury bonds.

Loan size: Jumbo vs. conforming 

Another way mortgages can be categorized is according to a set of standards used by Fannie Mae and Freddie Mac, two government-owned real estate finance corporations. Essentially, a conforming mortgage is one that meets the guidelines for what Fannie and Freddie considers a "standard" loan. These rules are updated  periodically, but they generally have to do with the size of the loan, as well as the credit requirements and interest rate used by the bank originating it.

On the other hand, jumbo loans adhere to a different set of standards. This is mostly due to their size - as of 2018, Fannie and Freddie considers any mortgage valued above $453,100  to be a jumbo loan, subject to different requirements than conforming loans. However, since housing costs vary widely across the U.S., the figure separating conforming and jumbo loans can be different from one area to another.

With so many different types of mortgages available, there truly is an option for everyone. Work with Vectra Bank to learn more about different mortgages and choose the one that makes the most sense for your goals.