Owning a Home: Loan Options > Consumer Financial Protection Bureau #mortgage #qualifier


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Understand loan options

Chosen by 25-30% of buyers

What to know

Your monthly payments are more likely to be stable with a fixed-rate loan, so you might prefer this option if you value certainty about your loan costs over the long term. With a fixed-rate loan, your interest rate and monthly principal and interest payment will stay the same. Your total monthly payment can still change—for example, if your property taxes, homeowner’s insurance, or mortgage insurance might go up or down.

Adjustable-rate mortgages (ARMs) offer less predictability but may be cheaper in the short term. You may want to consider this option if, for example, you plan to move again within the initial fixed period of an ARM. In this case, future rate adjustments may not affect you. However, if you end up staying in your house longer than expected, you may end up paying a lot more. In the later years of an ARM, your interest rate changes based on the market. and your monthly principal and interest payment could go up a lot. even double. Learn more .

Explore rates for different interest rate types and see for yourself how the initial interest rate on an ARM compares to the rate on a fixed-rate mortgage.

Understanding adjustable-rate mortgages (ARMs)

Most ARMs have two periods. During the first period, your interest rate is fixed and won’t change. During the second period, your rate goes up and down regularly based on market changes. Learn more about how adjustable rates change. Most ARMs have a 30-year loan term .

Here’s how an example ARM would work:

5 / 1 Adjustable rate mortgage (ARM)

Fixed period

This “5” is the number of years your initial interest rate will stay fixed.

Common fixed periods are 3, 5, 7, and 10 years.

Adjustable period

This “1” is the how often your rate will adjust after the fixed period ends.

The most common adjustment period is “1,” meaning you will get a new rate and new payment amount every year once the fixed period ends. Other, less common adjustment periods include “3” (once every 3 years) and “5” (once every 5 years). You will be notified in advance of the change .

ARMs can have other structures. Some ARMs may adjust more frequently, and there’s not a standard way that these types of loans are described. If you’re considering a nonstandard structure, make sure to carefully read the rules and ask questions about when and how your rate and payment can adjust.

Understand the fine print. ARMs include specific rules that dictate how your mortgage works. These rules control how your rate is calculated and how much your rate and payment can adjust. Not all lenders follow the same rules, so ask questions to make sure you understand how these rules work.

ARMs marketed to people with lower credit scores tend to be riskier for the borrower. If you have a credit score in the mid-600s or below, you might be offered ARMs that contain risky features like higher rates, rates that adjust more frequently, pre-payment penalties. and loan balances that can increase. Consult with multiple lenders and get a quote for an FHA loan as well. Then, you can compare all your options.

Loan type

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Conventional, FHA, or Special programs

Mortgage loans are organized into categories based on the size of the loan and whether they are part of a government program.

This choice affects:

  • How much you will need for a down payment
  • The total cost of your loan, including interest and mortgage insurance
  • How much you can borrow, and the house price range you can consider

Choosing the right loan type

Each loan type is designed for different situations. Sometimes, only one loan type will fit your situation. If multiple options fit your situation, try out scenarios and ask lenders to provide several quotes so you can see which type offers the best deal overall.

Conventional

Majority of loans

Typically cost less than FHA loans but can be harder to get

FHA

Low down payment

Available to those with lower credit scores

Special programs

  • VA: For veterans, servicemembers, or surviving spouses
  • USDA: For low- to middle-income borrowers in rural areas
  • Local: For low- to middle-income borrowers, first-time homebuyers, or public service employees

Loans are subject to basic government regulation. Generally, your lender must document and verify your income, employment, assets, debts, and credit history to determine whether you can afford to repay the loan. Learn more about the CFPB’s mortgage rules .

Ask lenders if the loan they are offering you meets the government’s Qualified Mortgage standard. Qualified Mortgages are those that are safest for you, the borrower.

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