Family moving into a new home.

How to determine the right mortgage for you.

After months of searching, you finally found the perfect house. It may be the largest purchase – and financial decision – you’ll ever make. Your mortgage can potentially impact your finances for decades, and finding the best fit could save you thousands of dollars. Once you understand your available options, including the benefits and drawbacks of each, you can make the best decision for your needs. Below, we share an overview of the three main mortgage types, along with factors to consider.

Loans: Conventional or government-backed.
A conventional loan is originated by a private company, like a bank. A government-backed loan is insured or guaranteed by a government organization.

  • To qualify for a conventional loan, you typically need to have strong credit and a higher down payment compared to government-backed loans. On the plus side, conventional loans may have a lower interest rate.

  • Government-backed loans offer a variety of options, including lower down payment requirements, to homebuyers who meet certain conditions. There are several common types of government-backed loans:

    • Especially popular with first-time home buyers, Federal Housing Association (FHA) loans are designed for borrowers who may have less than perfect credit or have a down payment that is too small for them to qualify for a conventional loan. Loans of this type are insured by the FHA. While less money is required upfront, they may come with extra fees.

    • Veterans Affairs (VA) loans help qualifying service members and veterans purchase homes with zero down payment and no mortgage insurance. A funding fee applies to this loan type.

    • United States Department of Agriculture (USDA) loans offer benefits such as no down payment and lower interest rates to those who qualify. Loans of this type are limited to primary residences located in eligible rural areas.
Factors to consider: If you’re able to pay more upfront, you could save more in the long run with a conventional loan. But, if you’re not able to put down enough to qualify, a government-backed loan can be a good option if you’d like to buy sooner rather than later. Just know that you may also pay more in the long term.

Interest Rates: Fixed or adjustable.
Interest rates determine the amount you’ll pay in addition to your principal mortgage balance.The interest rate, and whether it changes, depends on several factors, including the terms of your loan and what the economy does.

  • Fixed-rate mortgages have an interest rate that stays the same for as long as you have the loan, meaning that your monthly principal and interest payment won’t change. This can provide peace of mind if you’re raising a family, are settled in your career or are planning to stay in your home for several years.

  • Adjustable-rate mortgages (ARMs) have interest rates that fluctuate over the life of the loan, meaning your monthly mortgage payments may change. With an ARM, interest rates generally start at a lower rate than fixed-rate mortgages and remain fixed for a specific period, such as five, seven or ten years. After that, the interest rate may be adjusted every year, depending on the terms of your loan.
Factors to consider: A fixed rate can be a good choice if you plan to be in your house for a long time or value a stable monthly payment. On the other hand, the average life span of a mortgage is just five years, so you could save money with an ARM, especially if you plan to move or refinance in the short-term, and before the interest rate may change.

Loan Size: Conforming or jumbo.
If you’re looking at houses in a high enough price bracket, you may need to apply for a different type of loan. Conforming versus jumbo loans can be thought of as large and extra-large size loans, and they each come with certain requirements.

  • Conforming loans, also known as standard loans, currently limit loan amounts for one unit properties to $453,100 in most areas of the U.S., according to the Federal Housing Financing Agency.

  • Jumbo loans exceed the limit described for conforming loans, and are also referred to as non-conforming loans. While a jumbo loan allows you to purchase a higher-priced home, the loan may come with restrictions like higher down payment requirements, greater cash reserves or asset requirements, as well as stricter credit score requirements.
Factors to consider: The amount of money you borrow can impact your interest rate, with higher amounts potentially having higher rates. If your home is priced above local conforming loan limits, you may still be able to qualify with a larger down payment.

Taking time to understand your mortgage options can help you make the decision that will benefit you the most financially. It’s a good idea to consult with a mortgage lender for guidance on your current situation and overall financial goals. Whether you’re buying your first home, relocating or thinking about refinancing, Commerce Bank has mortgage loan options to help you reach your goals.

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