Mortgage Comparison

Choosing a mortgage can be both confusing and intimidating. With all of the different mortgage options available, it’s hard to know which is the right one for your situation, especially if you don’t understand the terminology involved. On this site, you will find explanations for some of the most frequently used terms in the mortgage loan industry.

Mortgage Interest Rates

One of the most important characteristic of any mortgage is the interest rate. The interest rate is the percentage used to calculate the fee you will pay to the lender for the use of the borrowed money. The higher this percentage is, the higher your payment will be each month. The interest rate can be fixed, meaning that it remains the same throughout the duration of the loan, or it can be variable, meaning that the rate will change in response to market behavior. The type of interest rate should always be taken into account when you compare mortgages.

Mortgage Credit Rating

Because different mortgage programs have different credit history requirements, a borrower’s Credit Rating is one of the most important aspects that must be considered when they compare mortgages for a home purchase or refinance. Generally speaking, if a borrower has an excellent credit rating, meaning that they have a FICO credit score of 720+ or above, they will be able to obtain the lowest interest rate possible through a conventional conforming mortgage.  If a borrower has a less than perfect mortgage credit score or has had a bankruptcy in their credit history, another mortgage type may better serve their needs.  FHA Loans, VA Loans and USDA Loans are all popular mortgages today and may be obtained with credit scores as low as 620+.

Mortgage Terms

Fixed Rate vs. Adjustable Rate – In the world of mortgages, there are a few different ways that you can get the payment that you want. When most people think of a mortgage, they think of a steady, fixed interest rate that applies to the principal over a period of usually fifteen or thirty years. Others like adjustable rate mortgages because they only plan to own their home for a limited time period or they believe that they can correctly predict where the mortgage backed securities market is going next, which is what drives interest rates.  When comparing a fixed rate vs. variable rate mortgage for your next loan, it’s important to understand the advantages and disadvantages of both.

Loan Term Length – After determining if a fixed-rate or adjustable-rate mortgage is best option for your mortgage comparison, another issue to consider is the loan term. The loan term is the length of time it will take you to pay for your home in full. The standard loan term for fixed rate mortgages are 15 years or 30 years, but longer or shorter agreements are available. When comparing these two mortgages, the 30 year fixed rate mortgage usually feature lower monthly payments. However, you will pay more total interest for a longer loan term than you would for a shorter one like the 15 year fixed mortgage.

Most borrowers choose a longer loan term because they cannot afford the payments associated with a shorter one. However, if you are able to afford a shorter term, you will build equity in your home at a much faster rate.

Mortgage Loan-to-Value Ratio

When you compare mortgages, you will also discuss the loan-to-value ratio. This ratio is the percentage obtained when you divide the total amount financed by the value of the property being purchased. Some mortgage programs, such as Conventional Conforming Mortgages, will allow a loan-to-value ratio of no more than 80 percent.  Other programs, such as FHA Mortgages, allow a loan to value ratio of 96.5% but they will require you to pay for mortgage insurance. USDA Mortgages or VA Mortgages, allow a loan-to value ratio of  100%, but do not require monthly mortgage insurance. They do, however, carry additional requirements for applicants and property to qualify.  For this reason, it is important for you to familiarize yourself with all of your mortgage options, especially if you have have less than a 20 percent down payment available when you purchase your home. If you are unable to afford such a large down payment, you will need to find a program and a lender that will accept a higher loan-to-value ratio with your qualifications.

Mortgage comparison can be a complex process, especially if you are a first-time homebuyer. However, if you do some research beforehand, you will be able to make an informed decision. Understanding these important terms is the first step to choosing the best mortgage for your new home.