Whether you are a first time buyer or you are looking at your second or third-plus home, selecting the right method of financing can impact your financial situation for years to come. There are many factors to consider when selecting a loan –- interest rates, points, processing and closing costs, how long you intend to own the home, and much more. These factors should weigh heavily in your ultimate decision.

While most buyers will compare interest rates among possible lenders, many do not fully comprehend how much of a difference even a half percentage point can make over the life of a mortgage. However, if one lender's rates look “too good to be true”, they probably are. Make sure you get all other costs associated with the loan and closing in writing. If their rate is exceptionally low, they are likely making up the difference in points or costs that are tacked on.

Conventional Loans

A conventional loan is one that is not insured by the Federal Housing Authority (FHA) or guaranteed by the Veterans Administration (VA). However, most lenders require Private Mortgage Insurance (PMI) when the down payment made is less than 20%. These loans require 5% to 10% down payments and generally take the form of 15 or 30-year fixed-rate mortgages, with principal and interest payments that remain the same throughout the life of the loan.

FHA Loans
To help make home ownership available to buyers that could normally not afford a substantial down payment, the Federal Housing Administration (FHA) will insure lenders against default for FHA approved buyers. Borrowers must be able to put at least 3% down and meet the agency's credit qualifications.

VA Loans

To help veterans of the U.S. Armed Services become homeowners, the Federal Government offers Veterans Administration (VA) Loans that insure the lender against borrower default. These loans require no down payment and are available only to military veterans.

Adjustable Rate Mortgage (ARM)
These loan programs typically offer a lower interest rate than fixed-rate loans, with low rates that remain fixed for only a set period of time (typically 3,5 or seven years). After this period, the interest rate is “adjusted” for another period of time, based on the current economic conditions. This process repeats itself throughout the life of the loan.

Balloon Mortgages

The payment plans for 5, 7, and 10-year balloon mortgages are developed based on a fixed-rate schedule (typically a 30-year program). Payments are paid monthly for the specified term (5, 7, 10 years), after which time the balance must be paid in full (balloon payment). These programs often offer buyers a lower interest rate and can be extremely beneficial if you do not plan to own the home for longer than the length of the loan.

Community Home Buyer's Program (CHBP)

The CHBP is a low down payment, fixed-rate mortgage designed by Fannie Mae to help creditworthy buyers, who don't qualify for conventional mortgages, purchase a home. Buyers can choose between a 15 or 30-year loan, but your income must be no more than 100% of your area's median household income to qualify. Down payments can be as low as 3%, but PMI will be required.

Graduated Payment Mortgage (GPM)
GPM programs offer the buyer lower loan payments at the beginning of the loan, with payments increasing on a fixed schedule for a predetermined number of years (typically 5 or 10 years) The payments made during the first couple years are applied to interest payment only. These programs can allow buyers to afford a larger mortgage than they could get with a conventional loan; however, this program can also result in a principal balance that increases over the first couple years of the loan, due to negative amortization. Buyers should consult a trusted financial professional before considering this option.