How to Choose a Mortgage: Tips for Getting the Best Loan

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. By refinancing your mortgage, total finance charges may be higher over the life of the loan.
Credible Operations, Inc. NMLS # 1681276, is referred to here as "Credible."

Most homebuyers don’t spend a lot of time learning how to choose a mortgage. After all, looking for the right property is the fun part.

But it’s important to know how to pick a mortgage. Buying a home will have a huge impact on your finances, and getting the most affordable mortgage will allow you to fully enjoy your new home instead of stressing over how much it costs.

Here’s how to choose the best mortgage for you in six steps:

1. Set a budget
2. Find the right type of mortgage
3. Pick the right loan term
4. Decide on a fixed-rate or adjustable-rate mortgage
5. Compare offers from multiple lenders
6. Take the next step — get pre-approved

1. Set a budget

Before you get a mortgage, you’ll have to budget for two things: the upfront costs of the home purchase and the recurring monthly payments.

Upfront costs

The upfront costs of buying a home can be substantial and include:

• Down payment: 0% to 20% of the sale price, depending on your loan program’s requirements.
• Closing costs: Typically 2% to 5% of the sales price, depending on your loan and location. The higher end is more likely to apply if your area charges transfer taxes on home sales. Besides taxes, origination fees and points are the biggest closing costs.
• Moving costs: A local DIY move might not run you much, but a professional out-of-state move can cost thousands of dollars.
• Furnishing and sprucing costs: While totally optional, many people immediately want to do things like paint their new home’s interior, replace the flooring, and buy things like window coverings, a guest bed, or home office furniture.

Recurring costs

The best mortgage options can minimize the recurring costs in your monthly mortgage payment.

• Principal and interest: Your principal is the amount you borrow to purchase a home. Interest is the cost of borrowing that money. The lower your principal and interest rate, the lower your monthly payment will be.
• Property taxes and homeowners insurance: Your lender may require you to pay a portion of your annual property taxes and homeowners insurance with each mortgage payment, especially if you put down less than 20%. If not, you’ll need to set that money aside yourself to pay these bills when they’re due.
• Mortgage insurance: If you don’t meet the down payment requirements for your loan, you’ll likely have to pay for mortgage insurance. For a conventional loan, these costs would be part of your monthly mortgage payment.
• HOA dues: If your home belongs to an association, you’ll need to budget for monthly association dues, though you’ll pay them separately from your mortgage.

Debt-to-income ratio

Creating a budget will also allow you to figure out how much of your monthly income is going toward debt. To qualify for a loan, you’ll want to make sure your debt-to-income ratio is no higher than 50%.

So, if your monthly income is $6,000 and you’re already spending $1,000 per month on loans and credit card payments, make sure to budget no more than $2,000 toward your monthly mortgage payment.

Find out how much you might owe monthly — and over the life of a loan — using our mortgage payment calculator below.

2. Find the right type of mortgage

There’s not one best type of mortgage. Different mortgages satisfy different needs. Here are the most common types of mortgages to help you choose the right loan for you:

Conventional loan

Best for: Homebuyers with a credit score of 620 or higher

Conventional loans are widely available, but they can be harder to qualify for than government home loans. To qualify, you’ll need to put at least 3% down and have a credit score of 620 or higher.

With Credible, you can see prequalified rates on conventional loans in a matter of minutes. Our online tools allow you to easily compare all of our partner lenders and secure a great rate — checking rates is free, and it won’t affect your credit score.

Jumbo loan

Best for: Homebuyers in expensive markets who can put down at least 10%

Jumbo loans are mortgages with balances larger than the conforming loan limit. In 2022, the limit is $647,200 in most areas but goes up to $970,800 in higher-cost areas. You’ll need a score of at least 680 to qualify.

FHA loan

Best for: Homebuyers with a credit score below 620

You can get an FHA loan with a credit score as low as 580 when you put 3.5% down — and as low as 500 when you put 10% down. Some lenders require higher scores, and you’ll pay for upfront and monthly mortgage insurance premiums.

VA loan

Best for: Qualifying military members, veterans, and eligible spouses

VA loans have an upfront guarantee fee but no monthly mortgage insurance. If you or your spouse has served in the U.S. military, you may be eligible for a VA loan. It’s best to have a credit score in the mid-600s or higher.

Check Out: VA Loan vs. Conventional Loan: How to Choose

USDA loan

Best for: Very-low-income to moderate-income buyers in qualifying suburban and rural area

USDA loans allow you to put nothing down, and they have no minimum credit score requirement. But they have extra costs: a guarantee fee and annual fee.

3. Pick the right loan term

The most common loan term is 30 years, followed by 15 years. Ask yourself these questions when choosing between a 15- vs. 30-year mortgage:

• Would you prefer a lower monthly payment or lower total interest costs?
• Can you meet financial goals like maximizing retirement savings while making the higher payments on a 15-year mortgage?
• Would you be comfortable putting the cash you save from a low-rate 30-year mortgage into potentially higher-return stock fund investments?

4. Decide on a fixed-rate or adjustable-rate mortgage

While 30-year and 15-year fixed-rate mortgages are the most popular options when choosing a home loan, you can also pick an adjustable-rate mortgage (ARM).

ARMs have a fixed interest rate for the first few years, and after that, the interest rate will change on a set schedule for the rest of the loan term. The total term will usually be 15 or 30 years.

Credible can help you compare mortgage rates from multiple lenders — check out our partner lenders in the table below.

When choosing between a fixed-rate mortgage and an adjustable-rate mortgage, here are some important questions to ask yourself:

• Do you plan to move or refinance before the fixed period on the ARM ends?
• If you plan to refinance, how does the cost to refinance compare with how much you could save on interest with an ARM?
• Are you comfortable with the risk that you may not be able to sell or refinance before the ARM’s fixed rate expires? Could you afford higher monthly payments?
• Do you prefer the stability of a fixed rate because you don’t like risk, or because you plan to keep your home long-term?
• Are interest rates on ARMs significantly lower than interest rates on fixed-rate loans right now? How much could you save?

Learn more: Interest Rate Cap: What It Means for ARMs

5. Compare offers from multiple lenders

Never settle for the first offer when you’re shopping for mortgage rates. Without comparing offers from multiple lenders, there’s no way to tell if you’re getting the best mortgage rate or the lowest fees.

Here’s what to consider when deciding between offers from different lenders:

• Rates: You want the lowest rate possible, all else being equal. But there’s often a trade-off between rates and fees. For example, if you get a no-closing-cost mortgage, you’ll usually pay a higher rate.
• Fees: Since there’s a trade-off between rates and fees, it can be helpful to look at your loan estimate and compare the annual percentage rate (APR) on each loan you apply for. APR combines fees and costs into one number.
• Time to close: If you’re buying a house, closing late can cost you money — and potentially the deal. Sellers usually prefer buyers who can close quickly, so choosing a lender that can finalize your loan faster may be a priority, especially in a seller’s market.
• Customer service: It’s important to have a responsive and well-informed loan officer to help you through the mortgage process. A good loan officer can answer any questions you might have regarding payment, rates, deadlines, and paperwork.

Learn More: 4 of the Best Mortgage Lenders

6. Take the next step — get pre-approved

Getting pre-approved helps you know how much you can borrow. Just as important, when you present a lender’s pre-approval letter with your purchase offer, the seller will know you’re a serious buyer and may be more likely to accept your offer.

Credible’s process is different from the traditional pre-approval process. It’s faster, has no impact on your credit score, and can help you get pre-approved across multiple lenders instantly.

Getting pre-approved with multiple lenders is a great way to find the best loan for you, whether that means securing the lowest rate, the lowest fees, or maximizing your borrowing power.

Keep Reading:

• How to Find the Best Mortgage Lender
• How Long Does It Take to Get Pre-Approved for a Mortgage?

About the author

Amy Fontinelle

Amy Fontinelle is a mortgage and credit card authority and a contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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