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Congratulations on taking the exciting leap toward new homeownership! One of your first steps? Comparing home loans. The right mortgage can significantly affect your monthly payments and long-term financial goals. Let's explore different loan options to ensure you secure the perfect mortgage fit for your needs and budget.
Understanding Home Loans
Your prospective home, goals and financial situation are one-of-a-kind. Your mortgage should be, too. Comparing different home loan options empowers you to make an informed decision and find the mortgage that best aligns with your current needs and future aspirations.
Factors to Consider Before Choosing a Home Loan
Selecting the right mortgage involves more than just looking for the lowest interest rate. While a competitive rate does matter, it's not the only factor to consider. You’ll want to think about the following as well:
Your Financial Health
- Figure out your prospective monthly mortgage budget. How much can you afford for a monthly mortgage payment after considering your income, expenses, and emergency funds?
- Be aware that your credit score affects the terms you’ll be offered.
- Calculate a down payment amount you can comfortably make for your new home (and be sure to factor in closing costs).
- Budget for mortgage insurance if you are putting less than 20% down.
Loan Types and Terms
- You can opt for the reliable stability of a fixed rate or the potentially lower initial payments with an adjustable-rate mortgage (ARM).
- Conventional loan programs versus government-backed ones (FHA, VA) offer different benefits to weigh. Discuss your goals and financial picture with your loan officer to see what specific type of loan may work for you.
- A shorter loan term will allow for lower interest rates and less total interest paid over the life of the loan, but you will have a higher monthly payment as a result of paying off the balance more quickly.
The Lender
- Ask about a lender’s fees, including origination fees, ongoing fees and any charges for early repayment.
- Inquire about any discount points and how they work.
- Get a new mortgage Pre-Approval before you shop for a home. This can give you a clearer picture of what you’ll be able to afford and make your offer appear more reliable to sellers.
Your Future Plans
- If you are planning to move in the next few years or want to expand your family, be sure to consider how this might affect your choice of home and the type of mortgage you obtain.
Types of Home Loans
Today's market offers a wide variety of home loans, each with unique features and benefits. But with so many choices available, it can take time to figure out which mortgage is the optimal fit for you. Let's break down the basics of the most common mortgage types to make your research a bit easier.
Conventional Fixed-Rate Loans
A conventional fixed-rate mortgage is a popular choice among homebuyers. The fixed rate offers a consistent interest rate and monthly principal payment for the entire loan term. This provides stability and ease in budgeting by eliminating concerns about increasing mortgage rates.
- Get a low fixed rate when you meet qualifying criteria.
- Choose from flexible term options to match your financial needs.
- Buy a home with as little as 3% down.
- Avoid mortgage insurance with a 20% down payment.
- Use for many types of properties, from single-family homes to condominiums.
Adjustable-Rate Mortgages (ARM)
An adjustable-rate mortgage (ARM) begins with a low fixed interest rate for a set introductory period. After this initial period, the interest rate periodically changes based on market conditions.
- Enjoy one low fixed interest rate for the initial introductory phase.
- Pay less for a short-term residence (when you plan to move in the not-too-distant future).
- Take cash out of your home equity while maintaining a low monthly payment.
- Choose from a wide range of down payment options.
FHA Loans
A Federal Housing Administration (FHA) loan is a government-backed mortgage with flexible credit score requirements and low down payment options. It can be ideal for first-time homebuyers or those with moderate credit.
- Buy a new home with as low as 3.5% down
- Allows for a broader range of income, debt and credit history than conventional loans
- Enjoy streamline refinancing benefits when rates drop
VA Loans
VA loans, guaranteed by the U.S. Department of Veterans Affairs, are available to veterans, service members and surviving spouses. These mortgages are designed to make homeownership more attainable to those who served.
- Government-backed loans reserved for U.S. service members and their spouses
- No down payment required
- No monthly mortgage insurance payment
- Typically lower interest rates than conventional loans
Jumbo Loans
A jumbo loan is a loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA) to help buyers finance a home in a higher price range.
- Loan amounts up to (and in some cases, exceeding) $3 million
- Borrowers can finance higher amounts in counties where the loan balance would exceed the conforming loan limit
- Eliminates the need for secondary financing
- No prepayment penalty (with Pennymac)
- Ideal for borrowers with high credit scores and healthy reserves
Investment Property Loans
Investment property loans are for a single-family, townhome, condo or multi-unit property that has been purchased with the intention of earning a return on the investment, either through rental income, future resale or both.
- Down payment and cash reserves required
- Fixed-rate and adjustable-rate options are available
- Interest rates may be slightly higher than traditional mortgages
- You may be able to use your current home equity to finance buying an additional property
Home Equity Loans
If you already own a home, a home equity loan converts your equity into accessible funds. Use the money to consolidate debt or to pay for large expenses like a renovation or school tuition. Under the right circumstances, you may also be able to apply the funds toward an investment property purchase.
- Receive a one-time lump sum payment based on your equity
- Rely on a fixed interest rate for predictable monthly payments, regardless of market changes
- Keep your first mortgage unchanged, as this is a second mortgage with a separate rate
Special Programs and Assistance
Whether you’re a first-time homebuyer or seeking to boost the value of your current home, various programs are available to support your goals.
First-Time Homebuyer Programs
Are you a first-time homebuyer? Explore special loans and programs that cater to those entering the market. Talk to a Pennymac Loan Expert to discuss your potential eligibility for these money-saving initiatives.
Regional Programs
State and local programs, including those from non-profits and housing authorities, may offer significant assistance with either your down payment or closing costs.
Tax Advantages
In addition, keep in mind that homeowners may qualify for several tax deductions, making homeownership more attainable. An accountant can help guide you, ensuring you maximize your benefits and comply with relevant tax laws.
Home Improvement Loans
Home improvement loans are designed to finance renovations and repairs, helping you enhance the value and comfort of your property.
Both home equity loans and cash-out refinancing can be excellent options for funding extensive home projects, such as a kitchen or bathroom remodel.
- Access a lump sum of funds immediately with either loan type.
- Keep your primary mortgage rate with a home equity loan.
- Rely on a low fixed rate and payment schedule.
- Get a tax deduction for home improvement costs. Consult a tax adviser for further information.
How to Choose the Right Home Loan for You
Once you have a solid understanding of your financial health and have familiarized yourself with the types of home loans available, you can start comparing lenders and loans. Consulting with a knowledgeable loan officer, like a Pennymac Loan Expert, can provide valuable guidance in exploring various mortgage options and identifying the one that best aligns with your individual needs.
Preparing to Apply for a Home Loan
Ready to get started? Here’s a quick list of things to do when preparing for your home loan application:
- Check Your Credit Report: Before contacting lenders, review your reports from all three bureaus (Equifax, TransUnion, Experian) at AnnualCreditReport.com. You get one free annual report from each bureau.
- Gather Documentation: Compile financial documents like pay stubs, tax returns and bank statements.
- Review Your Savings: Ensure you have enough funds to cover the down payment and closing costs, as well as moving and emergency expenses.
- Get Pre-Approved: Get a mortgage Pre-Approval to gauge your loan eligibility, boost your offer strength and qualify for Pennymac’s Lock & Shop program.*
- Limit New Debt: Avoid taking on new debts or making large purchases before and during the loan application process.
- Consult a Pro: Seek guidance from a loan professional, such as a Pennymac Loan Expert.
Demystify Mortgages With Help From Pennymac
Pennymac is dedicated to supporting your home loan needs from application to closing and beyond. Our award-winning team has helped over 4 million people build and sustain a foundation for homeownership. Compare our loan options, then contact a Pennymac Loan Expert today to learn more about how we can help you purchase or refinance your home.
*Lock & Shop Program allows consumers with a purchase mortgage Pre-Approval from Pennymac to lock a rate prior to locating a property. The program requires a non-refundable fee of $595 due at the time of the rate lock. Consumers with a purchase mortgage Pre-Approval from Pennymac must meet appropriate underwriting conditions to obtain a mortgage loan. Consumers may choose between a 60-day, 75-day or 90-day lock period. Consumers must initiate a mortgage loan application for a specific property and be under purchase contract for the property at least 30 days prior to lock expiration in order to extend the locked rate. All rate lock extensions are subject to Pennymac’s standard rate lock extension fees. After the rate lock and subject to favorable market conditions, consumers may be eligible for a one-time reduction in rate once the loan application for a specific property has been initiated (0.50 % maximum reduction in interest rate allowed). Eligible loan products are Conventional Fixed, Conventional ARM, FHA Fixed and VA Fixed. Program excludes Jumbo, refinance, third-party and in-process loans. Program subject to termination in Pennymac’s sole discretion and without notice.
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Meet Our Contributing Editors
Bradley Thompson and Afton Lambert are Contributing Editors for Pennymac’s consumer content and are exemplary leaders within the mortgage industry space. Both experts take pride in helping our customers achieve and sustain their aspirations of home.
For over 13 years, Bradley has achieved success as a high performer in various leadership roles including consumer direct sales and mortgage fulfillment positions.
With over 10 years of mortgage experience, Afton started her career as a top performing Loan Officer, before transitioning into her leadership role, where she has recruited, hired and trained Loan Officers.
