What are mortgage points?
Mortgage points are fees paid to a lender to reduce the interest rate you pay on your home loan. But how much do they cost, and are they worth it?
Sarah Harris
How to choose the right home loan for you
Before you search new home listings and schedule tours, it’s a good idea to think about what type of mortgage you want to secure when you find the right house. With so many options available, it can be overwhelming to decide which is the best fit for your financial situation and homebuying goals.
From conventional loans to government-backed programs, each type of mortgage loan has its own pros and cons to consider.
When it comes to mortgage loan options, there are several decisions you will need to make about how you want to repay your loan, including your term length and the type of rate (fixed or variable). Additionally, if you buy property that doesn’t fit under specific guidelines, you will need to use a nonconforming loan.
There is no right or wrong choice, since all options come with their own advantages and disadvantages.
“At this particular juncture where we are in an elevated rate market, we are advising our clients that if it makes sense and they qualify for an adjustable-rate mortgage, it is the way to go,” said Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage. “Almost all of the loans we are doing now will become refinances down the road, as everyone will want to take advantage of the next major market dip to secure a better long-term rate.”
Nonconforming loans are often jumbo loans, which are available for purchases that exceed the loan limits. With jumbo loans, buyers can finance higher-priced properties — but they have to meet stricter qualification requirements.
Banks and other lenders offer conventional mortgage loans, which aren’t backed by the government. They’re classified as either conforming or nonconforming, depending on whether they conform to federal mortgage loan limits and terms set by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac.
With a conventional loan, buyers have the option to borrow more money and get more flexible mortgage terms than government-backed mortgages. These loans are harder to qualify for than government loans, since they require higher credit scores and lower debt-to-income (DTI) ratios.
There are several types of conventional loans programs buyers can consider in addition to traditional ones:
Whom it’s best for:
Conventional mortgages are usually best for prospective homebuyers with a strong credit history, stable income and the ability to make a down payment of at least 5%. Conventional mortgage loans can be used to finance a primary residence, secondary home or investment property.
When a government agency, such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or the Department of Agriculture (USDA), insures a home loan that is issued by a private lender, that mortgage is considered a government or government-backed loan. All government-backed loans are within maximum conforming loan limits, which is $726,200 in most areas (up to $1,089,300 in high-cost areas) for 2023.
The downside is that even though you might secure a better rate for your current financial situation, government-backed mortgage loans have stricter property guidelines and higher fees. Not everyone will qualify, and even if you do, your home choice will have to fit specific conditions and price standards.
Whom it’s best for:
If you have low to moderate income or a less-than-great credit score, government-backed mortgages are typically easier to qualify for than conventional mortgage loans. FHA, VA and USDA loans have more relaxed lending guidelines and payment terms and might not require a down payment.
Nonconforming loans generally require larger down payments and come with higher mortgage interest rates than conforming loans. However, you can borrow a larger amount than with a conforming loan.
Jumbo loans, a type of nonconforming mortgage, are for amounts higher than the limits set by the FHFA. Currently, loans for greater than the conforming jumbo limit in a given county are considered nonconforming “jumbo” loans.
There are also super jumbo loans, which are intended for buyers who want to acquire bigger and more expensive homes. The loan limits are higher than those of jumbo loans and carry fixed or adjustable rates. The down payment normally ranges between 10% and 20%. To qualify, borrowers must have large incomes and assets, excellent credit history and low DTI ratios.
These loans are issued by private jumbo lenders, such as banks and other financial institutions. The private lenders set their own rules on requirements and approval and typically hold the loans as investments.
Note that while jumbo loans still can have competitive interest rates and loan term options like a conventional loan, you can expect a higher down payment requirement and higher closing costs and fees. Jumbo loans are harder to qualify for than conventional loans due to their stricter credit requirements.
Whom it’s best for:
Jumbo (nonconforming) mortgages are best for those who want to buy a really expensive house and have the credit score to qualify. Generally, nonconforming loans are best for high-income homebuyers who want to borrow above the limits of conforming loans and are willing to make a larger down payment.
Not all mortgage types fit neatly into the conventional or government-backed mortgage category. These other loans are suitable for buyers who need additional funds to renovate at the time of purchase, as well as current homeowners who want to tap into their equity or change their terms.
There are three types of renovation loans:
Here are the major types of home refinance loans and second mortgages:
When trying to choose a mortgage, start by comparing the interest rates and fees for each loan. Lower interest rates are better, since they mean you'll pay less money in interest over the life of the loan, but don’t rely on interest rates alone to tell you if you are getting a good deal — review the annual percentage rate (APR), which includes all fees. For example, if you choose a USDA loan, you will be tied to an additional 1% closing fee and 0.35% annual fee.
Another thing to consider before choosing your mortgage type is where you are financially as a buyer. Do you have an excellent credit score and a generous-sized down payment? A conventional loan will most likely give you the best rate and allow you to have more freedom in house choice. However, if your credit score is not the best or you don’t have more than 5% saved, a government-backed loan can help you still accomplish your homeownership goals.
Reaching out to a lender will give you a better understanding of which loan types are right for your finances and housing needs, as well as any issues you need to address before applying for preapproval.
Yes, a mortgage loan is backed by collateral. In other words, the physical house or property is attached to the financing. The lender holds a lien on the property, which means that if the borrower defaults on the loan, the lender has the right to foreclose on the property and sell it to recover the outstanding balance.
Fannie Mae and Freddie Mac are both government-sponsored enterprises. The main difference between the two is Fannie Mae tends to buy mortgages from larger lenders, while Freddie Mac purchases mortgages from smaller banks and credit unions.
Yes, and the easiest way to do this is through a home refinance. When you refinance your home, you’re taking out a new loan, but usually without jumping through as many hoops as you did when you first purchased. With a refinance, you can change the rate, the loan terms and even the loan type.
Understanding the different types of mortgage loans available is an important early step in choosing the best home loan for you or your family. The best type of mortgage for you will depend on factors like your credit score, income level and loan term preferences. Comparing multiple lenders will ensure you get the best terms on your home loan.
Mortgage points are fees paid to a lender to reduce the interest rate you pay on your home loan. But how much do they cost, and are they worth it?
Sarah Harris
Whether you're buying your first home or you’ve owned for years, there are quite a few deductible expenses, from mortgage interest to property taxes.
Emily Moore
Interest-only mortgages are nonconforming loans that let the borrower pay only on interest for a few years. Learn how they work and the pros and cons.
Bradley Schnitzer
Paying off your mortgage early can save you money on your loan. Learn how this process works and the pros and cons of early repayment.
Jennifer Schurman
Closing costs are lender processing, property and other fees paid to the lender when you close on a home. Learn how they work and how much they are.
Jennifer Schurman
Paying biweekly on your mortgage early on can shorten the repayment term on your home loan. Learn how this works and the pros and cons.
Jennifer Schurman
We’ll start sending you the news you need delivered straight to you. We value your privacy. Unsubscribe easily.