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Understand your financing options


Once you find your price range and the amount of your pre-approval, you’ll still need to take out a loan to cover the purchase of the home. There are two principal types of mortgage loans available in the lending markets today — fixed rate loans and adjustable rate loans. These fall into two additional categories: conventional and non-conventional loans.

Conventional mortgage loans

  Fixed rate mortgage (FRM) Adjustable rate mortage (ARM)
Interest rate Fixed for life of loan Fixed for initial period; adjustable thereafter
Term of loan 15 or 30 years 30 years; initial fixed rate periods of 3, 5, 7 years are typical
Down payment 10 – 25%* 10 – 25%*
Dollar loan limit No No
Biggest advantage Easy to budget fixed payment Lower initial rate for lower initial payments
Disadvantage If rates go down, rate stays fixed Your rate and payment will change (and often increase) in the future

*Twenty percent down is an industry standard. If a buyer puts down less than that amount, a lender may require the buyer to purchase private mortgage insurance (PMI), which insures the lender for the amount of loan that exceeds 80% of the price. PMI premiums add to monthly payments, so many people try to avoid it if possible.

Non-conventional mortgage loans

  Federal Housing Administration (FHA) Veterans Administration (VA)
Interest rate FRM and ARM options FRM and ARM options
Term of loan FRM: 30 years
ARM: 3-, 5-, 7-year initial periods
FRM: 30 years
ARM: 3-, 5-, 7-year initial periods
Down payment 2.5 – 4% 0%
Dollar loan limit Yes No, but limits by county may apply
Biggest advantage Low down payment and closing costs, and fees may be rolled into the loan No down payment, no private mortgage insurance (PMI)
Disadvantage Not all properties meet FHA requirements Limited eligibility
Eligibility You have to qualify for an FHA loan, and loans are made only through approved lenders You must be military, honorably discharged personnel or have spent at least 6 years in the Reserves or National Guard; surviving spouses of deceased service members may also be eligible