Which of These 4 Mortgage Types is Right for You?
From conventional to construction, there’s a wide variety of mortgage loans to choose from when you’re buying a home.
Modern farmhouse or mid-century modern, foursquare or Craftsman, there’s a house style to suit almost every personality. And just as houses come in a variety of styles to fit their owners, so do home loans. You’ll find a wide variety of mortgages to fit your financial situation and your individual goals.
Zions Bank’s Mortgage Division Manager Roger Jones breaks down the four types of home loans and the key components of each.
1. Conventional Home Loan
A conventional mortgage is a home loan that is held by a bank or other private lending institution. Conventional loans provide various options, including:
- Term: Mortgage term refers to the duration of your mortgage and typically ranges from 10 to 30 years. The term has considerable impact on your monthly payment amount as well as how much interest you’ll end up paying in the long run. Jones explains that for a 30-year, fixed-rate mortgage, it will take twice as long to pay off and incur more interest compared to a 15-year mortgage, but your monthly mortgage payment will be lower —and perhaps easier on your budget.
- Rate: With a conventional loan, you can opt for either a fixed rate or adjustable rate. Fixed-rate indicates that your interest rate is locked in for the life of your loan, while an adjustable rate is subject to change with market fluctuations.
- Size: Another element of your conventional mortgage loan is whether it is conforming or non-conforming. This industry designation refers to whether the loan amount meets the dollar value set by the Federal Housing Finance Agency. For 2019, the conforming limit for most home loans is $484,350.
This means if your loan is equal to or less than that amount you are more likely to qualify for better rates than if your loan is considered non-conforming. Jones also notes that there are additional guidelines required to be considered conforming, such as loan-to-value and debt-to-income ratio.
A conventional mortgage can be a good fit for a buyer who has excellent credit, a stable income and can afford a 20 percent down payment.
2. Government-Insured Home Loan
A government-insured loan is backed or issued by a federal agency and can be easier for certain borrowers to qualify for. This loan type offers lower down payment and credit score requirements and can be a great option for borrowers facing difficulty qualifying for a conventional loan.
The most popular government-insured home loans include:
- FHA: Offered by the Federal Housing Administration, an FHA loan is often ideal for first-time homebuyers. It requires at least a 3.5 percent down payment as well as upfront and annual mortgage insurance from all borrowers. Your mortgage insurance premium will be based on your down payment amount and other factors.
- VA: A VA home loan is offered by the Department of Veterans Affairs to current service members and veterans who qualify. A VA loan does not require a down payment (although the VA will charge a funding fee) or mortgage insurance.
- USDA: The U.S. Department of Agriculture offers home loans to those who meet requirements and are buying a home in a USDA-designated rural area. No down payment is needed, but USDA home loans do require mortgage insurance.
A government-insured mortgage loan can be a good fit for someone with good credit and a dependable income who doesn’t have enough cash saved up for a conventional down payment.
3. Adjustable-Rate Mortgage (ARM) Loan
An ARM is a home loan with an interest rate that resets depending on market conditions. Typically, there is a period when the introductory interest rate is locked, but eventually expires. Following the initial period expiration, the rate will adjust, often yearly, for the remainder of the loan term.
Traditionally, most consumers favor a fixed-rate mortgage when buying a home because it provides the security and reliability of interest rate stability. Jones says the advantage of an adjustable-rate mortgage is that it can offer significant benefits to those who aren’t interested in or do not need rate stability. For example, ARM loans offer lower initial rates compared to fixed-rate mortgages, saving borrowers money in the first few years.
This type of home loan can be a good fit for those who don’t plan to be in the home long-term or are seeking more buying power.
4. Construction Home Loan
If you’d like to build your home rather than buy it, a construction loan could be the answer. Consider saving both time and money with a Zions Bank one-time close construction loan. The phrase “one-time close” refers to the fact that the lot purchase, construction and permanent loan are all included in one transaction. This means there is only one set of home loan closing costs and loan documents.
Construction loans typically require a 5 percent down payment for loans within the conforming limit and they allow a borrower to lock in their interest rate before construction begins so there are no surprises when the home is completed.
This type of home loan can be a good option for someone who plans to build their home and wants to include their lot purchase, construction costs and mortgage in a single transaction.
Still wondering which mortgage is the best fit for you? Visit the Zions Bank Home Loan Learning Center to compare home loans, answer your mortgage questions and discover additional mortgage resources, including a directory of Zions Bank mortgage lenders across Utah and Idaho as well as more information about the home buying process.
Loans are subject to credit approval. Terms and conditions apply. See a banker for details. Equal Housing Lender. NMLS #467014.