How to Buy a Home with a Mortgage
When you get started shopping for a home for the first time, it can bring about a mix of feelings — excitement, stress, curiosity and more.
When you want to buy a home, you may need to get familiar with mortgages. Approximately 44 percent of U.S. consumers have a mortgage, according to Experian.
To dive in a little further, the median monthly mortgage payment was $1,609 in 2019, according to the U.S. Census Bureau in 2019. From January to March 2020, the average noncommercial conventional 30-year mortgage loan amount was $178,400, according to the Federal Housing Finance Agency (FHFA).
Ready to get one of your own? Let’s dive in.
Types of Mortgages
First, let’s consider the types of mortgage you can get. Don’t worry, your lender will give you an idea of what you can qualify for and offer you some pros and cons — you don’t have to walk into the bank and announce the type of mortgage you’d like to get.
The federal government does not insure conventional mortgages, which fall into two specific categories: conforming and non-conforming loans.
- Conforming loan: The loan amount falls within maximum limits set by the FHFA.
- Nonconforming loan: The loan amount doesn’t meet the expectations for guidelines set by the FHFA. A jumbo loan, explained in the next section, represents one example of a nonconforming loan.
A nonconforming but conventional mortgage, jumbo loans cover homes that exceed federal loan limits. In other words, for a single-family home in the U.S., the conforming loan limit sits at $548,250. However, in high-cost living places like New York City or Los Angeles, the limit hits a ceiling of $822,375.
“Government-backed mortgage” makes it sound like the government issues mortgages, doesn’t it? However, the government does not issue mortgages. Instead, it helps people get mortgages using the Federal Housing Administration for FHA loans, the U.S. Department of Agriculture for USDA loans and the U.S. Department of Veterans Affairs (VA loans). Read a little bit more about both:
- FHA loans: If you don’t have great credit, you may want to consider getting a FHA loan. You need a credit score of at least 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment. You can put 10 percent down if you have a credit score of 500, however. You do have to pay a mortgage premium for the life of the loan when you decide to take on a FHA loan.
- USDA loans: If you want to buy a home in a rural area or suburban area, you may want to look into a USDA loan. You must meet certain income limits in a USDA-eligible area.
- VA loans: U.S. military members (active and retired) and their families can tap into VA loans. You must pay a funding fee if you choose to get a VA loan. You can roll this fee into the loan itself or pay it upfront.
Mortgages with fixed interest rates stay the same throughout the life of the loan — you know what your payments will amount to every month. The most common fixed-rate loan terms include 15, 20 and 30 years, though you can also find different loan terms for fixed-rate mortgages. Note that you’ll usually pay more in interest for a fixed-rate mortgage. If you plan to stay in your home for up to 10 years, a fixed-rate mortgage may make the most sense for your needs.
Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages (ARMs) have interest rates that go up and down, depending on the market. Some stay the same for a set number of years, then change to a variable interest rate for the remainder of the term. ARMs may cap this interest rate up to a certain amount. You may not know what your ARM will go up to, so you have to feel comfortable with a certain amount of risk. If you don’t think you can swing the maximum mortgage payments, you might not want to get an ARM.