Buying a home for the first time can be intimidating, and the jargon used by industry professionals doesn’t help! In this article, we discuss the basics of mortgage loan options so you can understand how to evaluate your options and make the best decision for your specific situation.

One of the most important things to remember is that rates vary among lenders. This is why it is important to always shop around for a mortgage loan. This can help you not only compare interest rates, but also other loan options. 

Besides interest rates, each mortgage loan is usually a little different in three main categories: loan type, interest rate type, and loan term. 

Loan Type 

One of the first questions your mortgage broker may ask you is what type of mortgage loan you’d like. The different loan types include conventional, FHA, or other special programs, such as VA or USDA.

Comparing Mortgage Loan Types

The type of mortgage loan you choose will be based on your monthly budget, the amount of your down payment, your credit score, and any special considerations or qualifications.

  • Conventional mortgage loans.The majority of loans are conventional mortgage loans. These are loans that are not backed by a government agency. They are originated and serviced by private mortgage lenders (such as banks, credit unions, or other financial institutions). These loans are best for individuals who have a strong credit score, well-established credit history, and money set aside for a down payment.
  • FHA mortgage loans. FHA mortgage loans are government-insured mortgage loans that help buyers get into a home if they have lower credit scores and are having difficulty qualifying for a conventional loan. FHA loans may have upfront fees as well as ongoing mortgage insurance premiums that add to your mortgage cost.
  • VA loans.VA loans are backed by the U.S. Department of Veteran Affairs. These loans are designed for certain members of the military community. VA mortgage loans typically do not require a down payment and do not charge private mortgage insurance (PMI).  
  • USDA loans.USDA loans are backed by the U.S. Department of Agriculture and help homebuyers under a certain income threshold purchase homes in eligible rural areas. These loans typically have more flexibility with down-payment and credit score requirements.

Interest Rate Type

Interest rates for mortgage loans can be fixed or adjustable. Choosing between a fixed-rate or adjustable-rate is important since it impacts whether your interest rate can change, the predictability of your monthly principal and interest payments as well as how much interest you will pay over the life of a loan.

Comparing Fixed and Adjustable-Rate Mortgages

Fixed interest rates mean that for the life of the loan, your mortgage interest rate will remain the same. You will typically pay a higher interest rate for this certainty, but it ensures that your monthly principal and interest payments remain the same. Please note, your monthly payments may still change if there are fluctuations in your property taxes, homeowner’s insurance, or mortgage insurance.

Adjustable-rate mortgages mean your interest rate may go up or down, based on the market. These mortgage loans may offer an initial fixed period that will vary based on lender and loan. Some individuals consider an adjustable-rate mortgage if they plan to own the property for only a short period of time, as adjustable-rate mortgage loans can be less expensive in the short term. However, if the length of time extends, it can end up costing a lot more in the long run.

Mortgage Loan Terms

The mortgage loan term refers to how long you have to repay the loan. Mortgage loan terms can be 30 years, 15 years, or some other length of time. This term impacts your interest rate, monthly payment, and total cost.

Comparing Mortgage Loan Terms

Shorter-term mortgage loans usually include higher monthly payments. However, they also typically result in lower interest rates and lower total cost. The reason shorter-term loans can result in lower total cost is that you typically pay a lower interest rate for a shorter period of time, which usually results in a lower total interest cost over the life of the loan. 

Longer-term mortgage loans may have lower monthly payments but often result in higher interest rates and higher total cost. This higher total cost is typically due to paying a higher interest rate over a longer period of time, which usually results in a higher total interest cost over the life of the loan. 

What to Know If You’re Buying Your House in Cash 

Buying a house in cash is a less common method of purchasing a home, especially with higher home prices. However, it is not unheard of. Buying in cash is often attractive to sellers since it can help the home-buying process go faster and decreases the likelihood of the sale failing because of challenges with financing.

In addition to looking more attractive to potential buyers, buying a home in cash also means no mortgage payments, interest, or mortgage insurance. It can also decrease closing costs.

When comparing buying a house in cash vs. a mortgage loan, it’s important to consider whether you want your money tied up in the house. A home is fairly illiquid, meaning if you need money fast, it’s more difficult to receive funds, especially compared to being able to withdraw it from a savings account. To receive funds out of your house, you will have to put your house up for sale, find a buyer, negotiate a contract, close, and collect sale funds—or take out a home equity loan.

It’s also important to remember that expenses such as property taxes, homeowners insurance, and HOA dues still apply. Since these won’t be lumped into mortgage payments, you will need to manage these expenses on your own.

We’re Here to Help 

Rock Canyon Bank is here for you every step of the way in your mortgage lending process. We’ll help you complete your application, evaluate your options, and answer any questions you have (or even those you didn’t know to ask). Contact a Rock Canyon Bank near you to speak with a mortgage expert today.