Once you think through your goals and determine how much home your budget can handle, it’s time to choose a mortgage. With so many different mortgages available, choosing one may seem overwhelming. The good news is that when you work with a responsible lender who can clearly explain your options, you can better select a mortgage that’s right for your financial situation.
Here are the most common types of mortgages:
A fixed-rate mortgage means your mortgage interest rate – and your total monthly payment of principal and interest – will stay the same for the entire term of the loan. This offers you consistency that can help make it easier for you to set a budget.
When might a fixed-rate mortgage make sense?
- If you plan on owning your home for a long time (generally 7 years or more)
- If you think interest rates could rise in the next few years and you want to keep the current rate
- If you prefer the stability of a fixed principal and interest payment that doesn’t change
Adjustable-rate Mortgage (ARM)
Adjustable-rate mortgages (ARMs) have an interest rate that may change periodically depending on changes in a corresponding financial index that's associated with the loan. Generally speaking, your monthly payment will increase or decrease if the index rate goes up or down.
ARM loans are usually named by the length of time the interest rate remains fixed and how often the interest rate is subject to adjustment thereafter. For example, in a 5/1 ARM, the 5 stands for an initial 5-year period during which the interest rate remains fixed while the 1 shows that the interest rate is subject to adjustment once per year thereafter.
When might an adjustable-rate mortgage make sense?
- If you plan to move before the end of the introductory fixed-rate period, so you aren't concerned about possible rate increases
- If you want an initial monthly payment lower than a fixed-rate mortgage usually offers
- If you think interest rates may go down in the future
Alternative mortgage options
Some eligible homebuyers may qualify for an FHA (Federal Housing Administration) or a VA (Department of Veterans Affairs) loan. These loans tend to allow a lower down payment and credit score when compared to conventional loans.
FHA loans are government-insured loans that could be a good fit for homebuyers with limited income and funds for a down payment. Bank of America (an FHA-approved lender) offers these loans, which are insured by the FHA. VA loans are offered by VA-approved lenders (like Bank of America) and are insured by the Department of Veterans Affairs. To qualify for a VA loan, you must be a current or former member of the U.S. armed forces or the current or surviving spouse of one. If you meet these requirements, a VA loan could help you get a mortgage.