Dear Dr. Don,
I’m planning to buy a house. Which is the best mortgage loan option?
— Johnny Judgment
Start out by asking yourself how much house you can comfortably afford, given your income and what you have available for a down payment. Bankrate’s “How much house can you afford?” calculator will help you answer that question.
If you don’t have much money for a down payment, then you’ll want to look into Federal Housing Administration, or FHA, loans. This mortgage option allows you to get a loan with just a 3.5 percent down payment. Veterans can follow a similar path with a Veterans Affairs mortgage.
Conventional financing requires private mortgage insurance if the loan-to-value is greater than 80 percent. That means you’d need to make a 20 percent down payment to avoid PMI. Paying PMI isn’t the end of the world, but it is an added monthly expense in the early years of a mortgage. PMI typically goes away over time as you pay down your mortgage and build equity in your home.
If you plan on being in the home for a relatively short time, there’s another mortgage loan option to consider. I’d suggest a hybrid loan that roughly matches the time you expect to be in the home. A 5/1 adjustable-rate mortgage has a fixed rate for the first five years, and then the interest rate resets annually. As I write this, Bankrate’s national average for a 5/1 ARM is 2.72 percent, versus a 3.57 percent rate for a conventional 30-year fixed-rate mortgage. Don’t lock into a 30-year rate if you expect to be a short-timer in the loan.
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