To answer that question just follow three simple steps:
- How long do I plan on living in the home?
- What amount of income do I want to devote to my mortgage?
- What type of loan should I consider?
Every situation is unique. Just because one type of mortgage was good for let stay your neighbors or even your parents doesn’t mean that is the right mortgage for you.
Each borrower is different with a different set of needs when it comes to discovering the answer to “What mortgage is right for me?”. That being said; there are some basic steps you can take to help you decide what mortgage is right for you. When you go through the process of deciding remember to keep the focus on you and your financial goals; not someone else’s.
The First Question You Should Ask:
How long do I plan on living in the house and/or how long do I plan on keeping the loan?
If you say that this will be the last home you’ll ever buy and that you never want to do another mortgage again; then you should really only look at fixed rate mortgage loan programs.
Fixed Rate Mortgage:
There are 10 year, 15 year. 20 year, 25 year and 30 year fixed rate mortgage loan options. So if you’ve settled on a fixed rate mortgage than you need to decide how long you want to have the loan. This is where your personal short term, medium term and long term goals come in to play and it’s a discussion that eventually should include the loan officer as well. If you want a low payment; a longer tax benefit with the IRS then go into a 30 year fixed rate mortgage. If you want to pay the house of early then it’s a 10 or 15 year fixed rate mortgage. If you want something in the middle then go with a 20 year fixed mortgage rate loan.
Adjustable Rate Mortgage:
Now if you are only going to live in the home for a few years; less than 5 then you should consider an adjustable rate mortgage. There are 5/1 ARMs, 7/1 ARMs and 10/1 ARMs. The first number is the number of years the mortgage rate is fixed; the second number refers to how often it can adjust after the fixed period (this example refers to “1” so that means it can adjust once every year after the fixed rate period is up.
Second Question You Should Ask:
What percentage of my income do I want to devote to my home and all my debts?
Some may say this is more important and might be the first question you ask. The mortgage industry does have some limits on this so you can look to what are the maximums allowed as a guide. For FHA home loans you generally want to be below 43% Debt-T0-Income ratio and for Conforming loans you generally want to be below 45% Debt-To-Income ratio. Can you obtain approvals at higher DTI’s? Absolutely but approval rates significantly drop as you increase the DTI above the levels I’ve mentioned.
Notice it says “Debt” rather than “House”. That’s because DTI’s calculate all your debts and your home together as one. So if you have no debt then it’s an essay straight calculation. I suggest, especially for First Time Home Buyers, you keep your DTI below 40% when buying a home.
Third Question You Should Ask:
Should I obtain a Conventional or FHA home loan?
We’ve spent a lot of time on our website covering the two types of loans and we strongly encourage you to take the time and use the information we’ve provided to help make this decision. The best place to start is our Conventional – FHA comparison page which will help you decide which loan structure is best for you.
The simple answer is this:
- Low down payment or little equity and a low credit score – FHA
- Good to Excellent credit – Conventional
However there are exceptions to this so please be sure to visit our comparison page. If you can focus on the top three questions first you’ll be in a much better position when it comes to making important decisions about your new mortgage. And don’t forget this important fact, a Loan Officer is here to help – make sure you use that resource.
If the Loan Officer is not helpful then you should find one who is knowledgeable and one that is willing to take the time to answer any questions you may have. Here are some additional questions worth asking:
- If you’re buying a home; do you have 20% or more to put down as a down payment or do you have a limited amount to put down?
- Should you buy a Single Family Residence, a Townhome or a Condominium?
- How is your credit and should you consider improving it before moving forward with a new mortgage?
- Should you impound your property taxes and insurance?
Homeowners Refinancing Their Mortgage:
- Do you have a conforming loan amount or a jumbo loan amount?
- If you’re taking cash out; what’s it for and how much do you need?
- Have you paid your mortgage on time?
- Do you qualify for a Property Inspection Waiver (no appraisal)?
Some people find it helpful to make a “pros” and “cons” list when comes to making the decision on what mortgage is right for them. It’s a good way to see each loan and how the different programs may impact you positively and/or negatively. It’s also important to work closely with your Loan Officer as he or she will be able to provide additional insight as to which mortgage is right for you.