Choosing the right mortgage can be almost as important as choosing the right house. Your mortgage is a major commitment (for as long as 30 years!). Finding a mortgage that makes homeownership affordable, with manageable monthly payments and reduced out-of-pocket costs, can provide long-term financial stability and an opportunity to build wealth.
However, with a variety of mortgage products and terms to choose from, it can be hard to know which option is best for your unique financial situation today—and for years to come. In this post, we’ll provide our best advice for how to get a mortgage that works for you, outlining the diverse loan options we offer our customers in West and Northern Michigan, and breaking down their main features and requirements.
Types of Mortgage Loans
The key to understanding how to choose a mortgage is to know all the options available to you and have a basic understanding of how they work. These include fixed-rate and adjustable-rate conventional loans and government-backed mortgages.
Conventional Mortgage Loans
A conventional mortgage is simply a loan that is extended by a private lender, like your local bank—and not backed or insured by a government agency. Because all loan risks are carried by the lender, there are more rigid qualifying requirements, including having a credit score above 620 and a larger down payment. If you qualify for a conventional mortgage, it may offer the best rates or simplest approval and closing process—though this isn’t always the case.
Government-Backed Loans
As opposed to conventional mortgages, government-backed mortgages are guaranteed or insured by a US government agency. These mortgages are still offered through your bank, but in partnership with the agency. Each program has its own specific rules, requirements, and benefits, designed to best serve the individual group that it caters to.
Features of most government-back mortgages include:
- Lower down payments
- More flexible income and credit requirements
- Some restrictions on the type and condition of the property
Let’s take a look at some of the most popular government-backed loan programs available to buyers.
FHA Loans:
Backed by the Federal Housing Administration, these loans are perhaps the most common alternative mortgage product. FHA loans are a low down payment mortgage that allows you to put as little as 3.5% down—as well as having more flexible credit requirements than conventional loans. Though not specifically a first-time homebuyer program, these loans are very popular with first-time buyers
USDA Loans:
Available to low- and moderate-income homeowners USDA Rural Development Loans are guaranteed by the US Department of Agriculture and can be used to buy, build, or renovate a primary residence in designated low-population areas. Much of Michigan, including many of our service areas, qualify. Additionally, USDA Loans have no down payment requirement, as well as more flexible credit requirements. To learn more about this option, check out our recent post, What Is A USDA Rural Development Home Loan?
MSHDA Down Payment Assistance Loans:
Available to Michigan residents, MSHDA Down Payment Assistance Loans can provide the funds to help cover your down payment, through partnerships between the MI State Housing Development Authority and lenders like West Shore Bank. Borrowers can receive a loan of up to $7,500 statewide or up to $10,000 in select zip codes, including some of the communities we serve in West Michigan.
Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages
Conventional and some government-backed mortgages offer fixed and adjustable (variable) rate options. Depending on current interest rates and your plans for staying in your home, one type of mortgage may make more sense than the other.
With a Fixed-Rate Mortgage, your interest rate is locked in, and won’t change over the life of the loan. This means that your monthly principal and interest payments remain constant throughout the loan term, as well. Fixed-rate loans are ideal when interest rates are low, you plan to stay in your home in the long term, or you prefer the stability of consistent payments.
An Adjustable-Rate Mortgage, also called an “ARM” or “variable rate mortgage,” features an initial period of fixed interest, often at a lower rate than fixed-rate loans. Following this introductory phase, which commonly lasts 3, 5, or 7 years, your interest rate will reset at regular intervals, based on current market rates. You may want to choose an ARM if you expect interest rates to decline or you don’t intend to remain in your home for the long term—benefiting from the initial lower-rate period.
Mortgage Term Lengths
Aside from choosing a mortgage loan type, you will also need to choose a term that is right for you. Mortgage terms can vary in length, but the most common options include 15-year mortgages and 30-year mortgages. The more years there are in the term, the more payments your total loan amount will be spread out over, thus lowering the amount due each month.
Mortgages with shorter terms will have higher monthly payments, simply because there are fewer months. For instance, for 15-year mortgages your loan amount will be divided up over 180 months total, with interest. However, shorter-term mortgages often come with lower interest rates. If you can swing a higher monthly payment, you could end up saving a lot of money in the long run.
Longer term mortgages, like the popular 30-year mortgage, can make purchasing a home more affordable month-to-month, because there are more months in the term. In fact, thirty-year mortgages have twice as many monthly payments as 15-year (360). The tradeoff is that their interest rates are usually slightly higher, meaning that you will end up paying more in interest over the life of the loan. Another potential downside to a 30-year fixed-rate mortgage is that you are locked into your interest rate. If it’s a low rate, that can work in your favor. If it’s a higher rate, you may want to look into refinancing your loan if interest rates come down significantly.
How Much Mortgage Can You Afford
There are many factors that go into choosing the right mortgage—and often it’s less about finding the lowest-cost mortgage than finding a mortgage that meets your needs and that you are qualified to get.
One of the biggest qualifying factors is your down payment. The amount of down payment you can afford can not only dictate the size loan you qualify for, but the loan products that are available to you.
Conventional mortgages usually require a significant down payment, with lenders preferring 20% down. You don’t always need to have a 20% down payment, but anything less will require you to pay a monthly fee for mortgage insurance, a separate product that backs your loan, helping lenders recoup costs should you fail to make your payments on your home.
Government-backed mortgages have much lower down payment requirements, with some requiring no down payment at all (though all will have other closing costs due at settlement).
In addition to down payment sizes, your available income will be a major determining factor in your loan amount. Lenders will look at the amount of income you have each month and compare it to your current debt payments, making sure that your monthly payment is affordable. Generally speaking, lenders want housing costs to be below 30% of your monthly income. While debt-to-income ratios vary based on the loan product, lenders usually prefer that less than 36% to 43% of your income goes to debt payments, including your mortgage.
To calculate and compare potential monthly mortgage payments, you can use our Fixed-Rate and Adjustable-Rate mortgage calculators.
Meet with a Mortgage Lender
An experienced mortgage lender can play a pivotal role in guiding you toward the best mortgage for your needs. Lenders not only possess extensive knowledge about the process, local lenders can offer insights specific to the area where you intend to purchase a home, including regional homebuying assistance programs that aren’t available outside your locality.
Whether you're seeking advice or exploring your options, there's no fee or commitment required when consulting or meeting with a lender. At West Shore Bank, our team of trusted and experienced lenders across West and Northern Michigan is ready to assist you in navigating the complexities of mortgage selection and loan application.
Find the Right Mortgage for Your Needs at West Shore Bank
At West Shore Bank, we’ve been serving residents of Michigan’s shoreline communities for over 125 years. From first-time buyers to residents looking to purchase their vacation getaway, our range of home loan products are designed to serve a variety of home buying goals. And when you’re ready to apply, our online application is convenient and easy.
Ready to get started? Reach out to a member of our experienced, local lending team, or visit any of our convenient locations along the lake shore in Ludington, Hart, Scottville, Onekama, Frankfort, Manistee, and Traverse City to explore your Mortgage Loan options today!
