Mortgage Loans: One Size Doesn't Fit All

The state of the economy has a lot to do with interest rates, including the rate you’ll pay on a mortgage loan. But other factors go into the equation: your credit score, the amount of your down payment, the kind of mortgage you’re applying for and the term help determine your interest rate. Your personal circumstances will dictate which type of mortgage best fits your situation.

Conventional Loans

Conventional loans offered by banks, credit unions and lending companies account for the largest percentage of mortgages. A borrower must have a good credit score and a sizable down payment -- at least 20% of the purchase price, the threshold for not having to pay PMI (private mortgage insurance). PMI protects the lender in case of default and typically adds a substanial amount to monthly mortgage payments.

15 or 30?

Conventional loans come with 15- or 30-year terms. Monthly payments on a 30-year mortgage are lower, but you'll pay significantly more in interest over the life of the loan. Borrowers who are comfortable with a higher monthly payment should consider a mortgage with 15-year term, which typically offers a lower interest rate.

Fixed versus Adjustable Rate

Lenders may offer both fixed-rate and adjustable-rate mortgages. With a fixed-rate mortgage, payments remain the same for the life of the loan. With an adjustable-rate mortgage (ARM), the interest rate rises or falls based on market conditions. Although rates may start off low, borrowers risk higher rates in the future. ARMs are more suited to buyers who don't plan to stay in a home long term.

Government-backed Loans

FHA loans require a smaller down payment and may be appropriate for borrowers who don't qualify for conventional loans. Borrowers must pay a mortgage insurance premium (MIP), generally for the loan's term.

VA loans are available to veterans and don't require a down payment. However, if the housing market drops, borrowers could owe more than their home's value.