Choosing a Home Loan and Terms

By Steven Roberts Updated on 7/26/2017

There are several home loan programs available for you. Each option will provide terms that may or may not best suit your current financial situation. Before applying for your loan, you should do the due diligence and evaluate your options. 

Consider the individual benefits each program provides, including eligibility requirements, payment options, interest rates and costs.

Begin by considering your current financial situation and where you will find yourself in the next 5, 10 and 15 years. You will need to answer several questions before selecting the ideal type of loan and the specific loan program. Each has its unique benefits, and with a comparison, you'll find the right one.

Consider Your Finances:

• Assets: Annual salary, investments, savings, property, paid-off vehicles and tangible products.
• Liabilities: Credit cards, monthly bills, insurances, loans, children and future purchases.

Now Ask These Questions:

• Do you plan on having children and will you need to move into a larger home?
• How much disposable income is available and what can you afford each month?
• Have you saved enough for 20% down or can you afford monthly insurance?
• Is your career stable and are you confident your salary will continue to increase?
• Are you planning to purchase a home that is priced above $417,000?
• Do you intend to purchase a condominium, townhouse or single family home?
• Have you ever had a delinquent loan or have a credit score below 630?

What Home Loan Terms Should I Choose?

Fixed-Rate Mortgage

The fixed-rate mortgage is the staple loan product of the lending industry and is by far the most popular selection by home buyers. The contract locks in your low-interest rate for a particular length of time, eliminating the variable movement of interest rates year by year. This is the most secure option, and you may select a length of time that best suits your plans for the future. 

• 10 Year Fixed; Shortest term to pay off your loan but requires very high income. 
• 15 Year Fixed; Most common short-term repayment; low-interest payments
• 20 Year Fixed; Similar to 15 years fixed, slightly higher payment but safe choice.
• 30 Year Fixed; Most common long-term repayment; affordable interest payments.
• 40 Year Fixed; Difficult to obtain; longer interest payments become expensive.

Adjustable-Rate Mortgage (ARM)

Adjustable-rate mortgages begin with fixed interest rates for several years and, dependent upon the terms of the loan, the interest rate will begin to increase each year. 

The increase of interest rates are dependent on market rates for that year. Monthly payments will change regardless of your ability to cover increased costs in the future. The benefit is that you will have a few years with low-interest payments, but you're placing all bets on salary improvement within a few years. The introductory rate is typically much lower than fixed interest rate terms at the time you lock in your loan. 

The benefit comes with risk, as you can refinance into a fixed-rate mortgage before your interest rates reach unreasonable levels. However, success for this approach is dependent upon the volatility in our economy, current mortgage rates, and your financial circumstance. 

The nonconforming options are one year, five year, seven year and ten year ARM loans, and you select the payment options that you prefer.

ARM Loan Payment Options:

• Minimum Payment; 1 Year at an initial interest rate, then an increase each year at a set amount.
• Interest-Only Payment; Does not reduce principal amount and may change rate monthly.
• Fully Amortizing 30 Year; Pays both principal and interest on a monthly basis.
• Fully Amortizing 15 Year; Pays the principal and interest at accelerated terms, cutting costs.

What Home Loan Program Should I Choose?

FHA Loan

The Federal Housing Administration insures mortgage loans to ensure affordable options for home buyers. FHA loans have taken the market share in our mortgage market as the leading loan program. The relaxed requirements and beneficial financing options have made FHA the ideal choice for first-time buyers and low to middle-income classes.

Advantages to Consider:

• First-time buyer incentive programs
• Minimum down payment is 3.5%
• Minimum credit score is 580
• No penalties for early repayment
• Lender fees may be added to the loan
• Short waiting period to qualify after foreclosure

Disadvantages to Consider:

• Required Mortgage Insurance Premiums 
• Required home inspection with strict standards

Conventional Loan

Conventional loans are not insured by the Federal government directly. However, they can be bought in a secondary mortgage market by government-sponsored agencies, referred to as Fannie Mae and Freddie Mac. 

The ability for a lender to sell the "risk" of you defaulting on your loan, mostly keeps interest rates reasonable and down payment requirements low. Conventional loans can be non-conforming, which are above loan limits set by Fannie and Freddie, more specifically for wealthier individuals purchasing luxury homes. There is a variety of customizable loan options available, along with several benefits.

Advantages to Consider:

• Minimum down payment is 5%
• Minimum credit score is 660
• Best available interest rates credit above 720
• No monthly insurance for down payments above 20%
• Insurance canceled upon 22% equity in the home
• More relaxed home inspection appraisal

Disadvantages to Consider:

• Higher down payment requirement than FHA (for now)
• Poor credit scores are not qualified
• Private mortgage insurance with less than 20% down
• Longer waiting periods to qualify upon foreclosure