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How to pick a mortgage

Key takeaways

  • Before you start shopping for a mortgage, become familiar with the different types of loans, and what may be available to you.
  • Some of the most important decisions you’ll need to make are whether to get an adjustable-rate or fixed-rate mortgage, and the length of your loan term.
  • Some borrowers may also consider whether they are eligible for specific loan programs, such as FHA or VA loans.

Shopping for a mortgage can be overwhelming in any environment. But with interest rates as high as they currently are, committing to a long-term loan may feel even more stressful.

That’s why it’s important to make sure you’ve done your homework on all the loan types that may be available to you, and what makes the most sense for your situation. Making an educated decision about your mortgage choice could not only potentially save you money, but also help you feel more confident about this major financial decision.

Assuming that you’ve already evaluated your readiness to buy a home and weighed it against renting, the next step is determining how much home you can afford. Once you have a general idea of how much you plan to borrow, it may be time to start visiting lenders.

Here’s a look at some of the major decisions you may have to make about what type of mortgage to take on, plus how to decide what may be right for your situation.

Should you get a fixed-rate or adjustable-rate mortgage?

What it means: A fixed-rate mortgage is issued with an interest rate that stays the same over the life of your loan. This also means that your monthly mortgage payment stays the same over the life of your loan.

With an adjustable-rate mortgage (also known as an “ARM”), the interest rate is fixed for a certain number of years, but then will fluctuate—rising or falling as interest rates rise or fall—for the remaining term of the loan. For example, a “7/1 ARM” would be a mortgage that has a fixed rate for the first 7 years, after which point the interest rate on the loan may adjust 1 time per year. (There may also be a limit on how much the interest rate may adjust each year, and how high it may go over the life of the loan.)

Why it matters: ARMs often come with lower initial interest rates than fixed-rate mortgages. But, because that initial rate is not locked in forever, and could increase down the line, they also come with more risk. By contrast, a fixed-rate mortgage may come with a higher initial monthly payment, but provides assurance that your payment won’t ever increase over the life of your loan.

How to choose: If you plan to stay in your home for a long time, or you are risk averse or expect rates to rise, a fixed-rate loan might be a better choice. You can lock in the current rate without worrying about future interest-rate changes. And if rates fall in the future, you can always choose down the line to refinance into a lower-rate loan.

That said, there can be some situations where an ARM makes sense. For example, if you know you will only live in the new home for a few years, and have decided this makes sense for your financial situation, then it might make more sense to choose an ARM. Lenders may offer ARMs with fixed-rate periods as short as 3 years or as long as 10 years. If you feel confident that you will sell the home before the fixed-rate period is over, then you may not need to worry as much about future rate adjustments, and you could potentially get a lower rate than you could with a fixed-rate loan.

Should you get a 15-year or 30-year mortgage?

What it means: This refers to the length of your loan term. In other words, if you make only your required monthly payments (and don’t pay ahead of schedule), it tells you how long it will take to completely pay off your mortgage.

Why it matters: Longer loans typically come with higher interest rates. But, because you’re spreading your loan payments out over a longer period of time, your monthly payment will typically be lower. So, for example, suppose you’re borrowing $300,000 and choosing between a 15-year or 30-year mortgage. With the 15-year mortgage, you’ll pay less interest in total over the life of the loan, but you’ll have a higher payment each month. With the 30-year mortgage, you’ll have a lower monthly payment—but, because you’re making that monthly payment over 30 years instead of 15, and at a higher interest rate, you’ll end up paying more in interest, in total.

How to choose: If given the option, most people would prefer to pay less in interest, rather than pay more. If you can afford the higher monthly payments, then going with a 15-year loan can potentially be a way to save tens or even hundreds of thousands of dollars in interest over time.

But for many people’s budgets, a 15-year mortgage simply isn’t a realistic option. Don’t jeopardize your cash flow or financial stability just to squeeze into a shorter-term loan. Many people find that a 30-year mortgage is the better fit for their financial situation.

Should you get a conforming or jumbo loan?

What it means: A “conforming” loan means one that meets certain federal government guidelines. These guidelines include meeting a certain minimum credit score, and not exceeding a maximum debt-to-income ratio. They also include a maximum loan amount. In most parts of the country, for 2023, the most you can borrow with a conforming loan is $726,200, for a one-unit property. (This maximum amount may be higher in some expensive areas.) Mortgages for amounts greater than that are generally called “jumbo” loans.

Why it matters: Mortgages that meet the conforming-loan guidelines can be acquired by Fannie Mae or Freddie Mac. This means they may come with lower interest rates than jumbo loans. Due to the size of jumbo loans, they may be considered riskier than conforming loans, and so you may need to have a higher credit score, higher down payment, and/or lower debt-to-income ratio than you would need for a conforming loan.

How to choose: The most important consideration in determining a mortgage size is what you can afford (even more important than what you can qualify for). Regardless of whether you are considering conforming or jumbo loans, make sure that you are not overextending yourself with your mortgage payment. And remember that once you buy, your mortgage will be just one part of your home expenses—in addition to taxes, insurance, maintenance, and more.

Should you get private mortgage insurance or piggyback loans?

What it means: In a perfect world, you could make at least a 20% down payment. If you can’t, you generally have 2 potential options.

One is to pay for private mortgage insurance (PMI). This insurance essentially increases your monthly payments, and it acts to protect your lender against the possibility of you defaulting, or missing payments. The cost typically ranges from 0.25% to 2% of your loan balance each year. In general, the higher your down payment, in percentage terms, the lower the rate on your PMI may be.

The second is to consider a “piggyback loan.” This is a second mortgage on your home, taken at the same time as your first mortgage, which acts to bring your down payment up to 20% of the purchase price. For example, the most popular scenario using a piggyback loan is the “80-10-10.” This means that 80% of your home purchase is covered by the first mortgage, 10% is covered by the second mortgage, and the remaining 10% is your out-of-pocket down payment.

Why it matters: PMI will increase your monthly payment, and unfortunately comes with no tax advantages. But the good news is that you can get rid of PMI eventually (typically, once the principal outstanding on your loan reaches 78% of the original value of your home). On the other hand, you may be able to deduct the interest on a piggyback loan. However, in that case you’ll have 2 separate monthly payments, your second loan will likely have a higher interest rate than your first, and you may have to pay closing costs on 2 separate loans.

How to choose: There isn’t necessarily an easy answer here. The right answer for you may depend on the specifics of how much you need to borrow, how long you would expect to pay PMI, whether your credit score would allow you to qualify for a piggyback loan, and other factors.

Should you get an FHA loan?

What it means: A Federal Housing Authority loan, or FHA loan, is a loan issued under a government-backed program to help first-time homebuyers. These loans are issued by traditional mortgage lenders (like a bank), but then insured under a federal government program.

Why it matters: These loans may be an option for people who don’t qualify for a traditional conforming loan, because they typically don’t require as high a credit score or as large a down payment (the minimum down payment is only 3.5%).

How to choose: If you can’t qualify for a traditional conforming loan, then an FHA loan could be an option to help you access homeownership.

Should you get a VA loan?

What it means: A VA loan is a mortgage guaranteed by the US Department of Veterans Affairs. The loans are designed to provide eligible servicemembers, veterans, and surviving spouses with affordable mortgages.

Why it matters: These loans can come with the unique potential benefit of requiring no down payment and no PMI for first mortgages. However, there’s generally a cap on the maximum loan amount, and borrowers must generally pay a funding fee of up to 3.3% of the loan amount.

How to choose: If you are eligible for a VA loan and you have a small down payment or no down payment then it may be an option worth considering. Even if you could qualify for a conventional conforming loan, it could still make sense to compare interest rates against that of a VA loan (if you are eligible), just to make sure you access the most competitive rate possible.

Loan type Required credit score Maximum loan amount Other eligibility requirements
Conforming Minimum of 620, generally $726,200 in 2023 for a one-unit property in most counties (may be higher in certain high-cost counties) May consider maximum debt-to-income ratio
Jumbo May be higher than for a conforming loan Greater than $726,200, or the conforming loan limit in your county May require greater down payment and lower debt-to-income ratio
FHA Minimum of 500 or higher (depending on amount of down payment) $472,300 in 2023 for most parts of the country (or as high as $1,089,300 in highest-cost areas) May consider maximum debt-to-income ratio and employment history
VA May vary by lender $726,200 in 2023 for a one-unit property in most counties (may be higher in some high-cost counties) Generally only available to eligible servicemembers, veterans, and surviving spouses

Know your loans

It's important to know all your options so you can make the best choice when it's time to buy a home. Understanding how mortgages work, your budget, and time frame can help you pick a loan that fits your situation—and can potentially save you thousands of dollars over many years.

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Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

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