Refinance

Which mortgage type is right for you?

7 min read

Which mortgage type is right for you?

Just like hunting for a house, hunting for a mortgage can take time and research to find the right one for you. Each loan type has its pros and cons, so we've broken it all down to give you a sense of all your options.

Loan types

When you start looking for a mortgage, you'll see that there are different types of loans that you can get.

Conforming loans

A conforming loan adheres, or “conforms,” to guidelines set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that guarantee most mortgages in the U.S. If a mortgage is within these guidelines, it can be sold to the GSEs. Many lenders will do so that they can continue to fund more mortgages. Due to these guidelines, conforming loans have limits on how much money can be borrowed, and the number usually changes year to year. In 2021, the limits are $548,250 in most parts of the country and $822,375 in costlier areas.

Conforming loans

Pros:

  • Very common and easy to get advice on

Cons:

  • Limited amount you can borrow

Who's it good for?

  • Someone who is looking for a standard, run-of-the-mill mortgage and doesn't need to borrow a lot

Nonconforming loan

Unlike a conforming loan, a non-conforming loan doesn't meet FHFA guidelines. Jumbo loans are one of the most common types of nonconforming loans because they typically exceed the borrowing limit.

Nonconforming loan

Pros:

  • A way to borrow money for a large amount

Cons:

  • Not quite as common and not offered by ever lender

Who's it good for?

  • Someone who needs to borrow a lot for their new home

Conventional loan

A conventional loan is any mortgage not backed by the government. These types of loans make up a large share of the mortgage market and are offered by a wide range of lenders. Generally, these loans require a minimum credit score of 620 to qualify.

Conventional loan

Pros:

  • Stability and consistency

  • The lender may be more willing to negotiate with you on certain terms

Cons:

  • May be harder to qualify for

  • The lender might impose fees (like prepayment penalties)

Who's it good for?

  • Someone who has stable credit and income

Government loan

A government loan is, unsurprisingly, a loan that's guaranteed or insured by the government. This includes FHA loans, insured by the Federal Housing Administration; VA loans for military service members and veterans, guaranteed by the U.S. Department of Veterans Affairs; and USDA loans for borrowers in certain areas, guaranteed by the U.S. Department of Agriculture. These loans usually have some sort of additional fee or insurance attached to them, but they also have a low or no down payment requirement and potentially a lower credit score requirement, too. 


Government loan

Pros:

  • Easier to qualify for, especially if you have lower income

  • Requires little to no down payment

Cons:

  • May have higher monthly payments because of the low down payment

  • May require mortgage insurance and other fees

Who's it good for?

  • Someone who doesn't qualify for a conventional loan because of their credit score, income or down payment amount

Loan rates

When you're looking for a mortgage, one of the most important numbers to look at is the rate. This number, expressed as a percentage, shows how much you'll pay in interest for borrowing the money to buy your home. This number will either stay the same or change throughout your loan term. 

Fixed-rate mortgage

With a fixed-rate mortgage, the interest rate on the loan will stay the same throughout the loan term. Therefore, your monthly payments will be the same throughout your whole loan.

Fixed-rate mortgage

Pros:

  • Your interest rate won't change, so you won't see spikes in your monthly payment

Cons:

  • You won't see any savings when market rates are lower unless you refinance

Who's it good for?

  • Someone who prefers predictable monthly payments or plans to stay in their home for at least seven to 10 years

Adjustable-rate mortgage (ARM)

With an adjustable-rate or variable-rate mortgage, your interest rate will fluctuate based on a market index plus a lender margin. Most ARMs start with a fixed rate for a set number of years, then switch to an adjustable rate that can change at specific intervals. For example, a 5/1 ARM will have a set rate for the first year, then adjust once each year until the end of the loan term.

Adjustable-rate mortgage (ARM)

Pros:

  • You may pay less money upfront

  • If the market is good, you'll pay a lower rate without having to refinance

Cons:

  • Fluctuations make it hard to plan your monthly payments

  • If the market takes a turn for the worse, you'll have to pay more

Who's it good for?

  • Someone who isn't risk-averse and doesn't plan to stay in their home for more than a few years

Loan terms

Another way that loans can differ is with their terms. Basically, your term is how long you have to repay your mortgage, which determines how much you'll pay on your monthly payment and interest rate. Mortgages with 15- and 30-year terms are the most common, but 10- 20- and 40-year loans are also available.

30-year mortgage

If you're planning to be in the home for a while or are looking to lower your monthly payment, a 30-year mortgage may be good for you. With a 30-year mortgage, your monthly payments are spread out over a long time, so they tend to be lower than what they’d be if you had a shorter-term loan. If you had a $280,000 loan at 3.3 percent fixed interest over 30 years, for instance, your payment would total $1,226.

30-year mortgage

Pros:

  • Longer term means a lower monthly payment

Cons:

  • You'll end up paying more in interest over the life of your loan

Who's it good for?

  • Someone who plans to stay in their home for a while and is looking for lower monthly payments

15-year mortgage

If you have the means for a slightly higher monthly payment and want to save money on interest, a 15-year mortgage mat be better. With a 15-year mortgage, your monthly payment tends to be higher than what it’d be with a longer-term loan, because you have less of a repayment period. However, 15-year mortgages often have lower interest rates than 30-year ones. If you had a $280,000 loan at 3 percent fixed interest over 15 years, your payment would total $1,933.

15-year mortgage

Pros:

  • You'll pay less in interest over the life of your loan

Cons:

  • You'll have to pay a higher monthly payment than you would with a longer term

Who's it good for?

  • Someone who has enough cash to pay a higher monthly payment and wants to save on interest

Other kinds of mortgages

There are a few cases where you may qualify for (or need) a specialty mortgage. Your loan officer will be able to talk you through everything and help you find the right option for you.

Balloon mortgage

A balloon mortgage lets you may smaller—or no—monthly payments until the end of a set period, usually around five to seven years. After that, you'll owe the remaining balance of the loan in one lump sum, which is known as a balloon payment. These mortgages typically have lower interest rates, and might be a good idea if you expect to have a significantly better income or credit score in a few years, or if you plan to sell the home before the loan term is up. However, there are a lot of risks associated with balloon mortgages, so it's important to talk to your loan officer about all your options.

Interest-only mortgage

Like a balloon mortgage, an interest-only mortgage lets you keep your payments down for a period of time. In this case, though, you'll pay only toward interest for that time. Once the period ends, you'll start paying the normal mortgage payment, which includes interest and also money toward the principal. 

Finding the right mortgage

There are many types of mortgage loans, and they vary by size, monthly payment, interest rate, terms and other features. When deciding which one is right for you, it's important to think through what's most important to you. Are you looking for a low monthly payment or to pay it off as quickly as possible? Are you refinancing to get equity to pay for home repairs or because you'd like a lower interest rate? Asking yourself these questions will help you determine what factors to look for as you shop rates from multiple lenders. 

See how much you could save with Sage

Start your application now to see which loans you qualify for and how much you can save with Sage Mortgage.

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