How to Choose a Mortgage

Understand Mortgage Rates to Find the Right Loan for You

When you are buying or refinancing a home, you’ll want the right mortgage for you. The interest rate, loan type, fees, closing costs, and terms are important for your decision. Read our practical advice on how to choose a mortgage!

1. Look at the Interest Rate and the Annual Percentage Rate (APR)

An interest rate is the cost you pay to borrow money, shown as a percentage. When you are choosing a mortgage, be sure to look at the mortgage rate versus the APR or "annual percentage rate." APR includes interest charges, as well as points and other fees you might have to pay. APR helps you understand the cost of a mortgage. Looking at APR is a good way to compare different mortgage offers.

2. Choose Your Mortgage Type

You may be able to choose from different mortgage types when you buy or refinance a home. Look at the advantages and disadvantages of each.

• Conventional loans. You can use Conventional mortgages to finance a home, a vacation home, or an investment property. When you are buying a home with a Conventional loan, you can avoid paying private mortgage insurance by making a 20% down payment. Refinancing a Conventional loan requires you to complete a new, full application.
• VA loans. This is an excellent choice for Veterans and active-duty military personnel who qualify. VA loans have competitive rates and terms. When you are buying a home, you may be able to make a 0% down payment. VA IRRRL refinancing allows qualified homeowners with VA loans to reduce their rate with less paperwork and faster closings. You can use VA loans solely to finance primary residences.
• FHA loans. FHA loans make homeownership more affordable with flexible credit scores and competitive rates and terms. These types of loans can have low down payment requirements. They also have a streamline refinancing option for homeowners who qualify. Similar to VA loans, you can only use FHA loans to finance primary residences.

3. Pick Your Mortgage Term

Your term is the number of years you’ll have to pay the loan back. Mortgages often have terms of 15, 20, or 30 years. Home loans with shorter terms can have lower interest rates but higher monthly payments. Check out our mortgage payment calculator to estimate how term length might affect your payments. If you are a Freedom Mortgage customer, you can keep your current loan term when you refinance with us!

4. Compare Fixed Rates versus Adjustable Rates

Fixed-rate mortgages have the same interest rate for the life of the loan. With an adjustable-rate mortgage (ARM), the interest rate can vary throughout the life of the loan. ARMs usually have an introductory rate that stays the same for a specified period of time. After this period, the rate may adjust, and your monthly payments could go up or down. For more information, read our article about fixed-rate and adjustable-rate home loans.

5. Look at All the Borrowing Costs

Interest payments are not the only cost of financing a home. You may be required to pay points (one point is equal to 1% of the loan amount). You can also choose to pay discount points to lower your interest rate. Lender fees can also vary, from mortgage to mortgage. Make sure you look at the cost of private mortgage insurance or mortgage insurance premiums you may have to pay. It’s also a good idea to ask about title searches and other fees you may have to pay at closing.

6. Check Your Credit Score Before Applying

Lenders look at your credit score to help determine if you qualify for a mortgage to buy or refinance a home. Your credit score also can affect the interest rate you’ll get. It’s a good idea to check your credit score and view your credit report before you apply for a home loan. That way, you may be able to correct any errors you might find. It will also give you a chance to look for ways to boost your credit score, which can help save you money in the long run.

Last reviewed and updated April 2024 by Freedom Mortgage.