Which mortgage is right for you? Take the quiz

Whether it’s a fixer-upper, a remodeled ranch, or a downtown townhouse, finding your perfect home can feel like a dream come true. But before you can turn your wish into reality, you have another essential choice to make: what type of mortgage to get.

For first-time homebuyers and repeat shoppers alike, picking your ideal mortgage begins with knowing exactly what you’re looking for in your next home and how much you can afford to spend. Plus, you’ll probably want to consider factors like how long you may live in your home and what kind of down payment you can make.

But picking out a mortgage isn’t exclusive to home shoppers. In fact, homeowners with an existing mortgage can take out a new one as well. And choosing the right mortgage when refinancing is just as important.

So, no matter if you’re taking out a mortgage for the very first time or giving your current mortgage an upgrade by refinancing, it’s good to consider all your options to find the best home loan for you and your budget.

It may not be glamorous, but you can’t start your home search without some budgeting to figure out how much house  you can actually afford . A good place to start is determining your debt-to-income ratio (DTI) by using our  Home Affordability Calculator.

DTI is calculated by taking the amount of your monthly debt payments (credit card debt, student loans, etc.) and dividing it by your gross monthly income. Ideally, your DTI is below 43%. While you could get a mortgage with a higher DTI, the lower the better for both you and your lender.

If you’re on the hunt for a mortgage, there are some additional costs buyers often overlook initially. You’ll need to account for all the expenses of getting a mortgage, including the down payment and closing costs (which typically fall between 2 and 5% of the home’s price and include expenses like title charges, real estate taxes, and homeowners insurance). Traditional thinking says that you need  20% of the home’s cost for your down payment . But don’t panic if you don’t have that much saved up. Some lenders will accept as low as 3.5%. (More on this below.)

Take note: The smaller the down payment you start with, the more risk there is for your lender. So, if you make a down payment that’s less than 20%, it’s likely you’ll have to pay for private mortgage insurance (PMI).

If you can afford to put down 20% (or more), your benefits could include: increased home equity, decreased monthly payments, and potentially thousands saved in interest charges.

You should also review your credit history before beginning your home-buying journey. Your credit score can have a major impact on your ability to get pre-approved for different types of home loans, as well as the interest rate (which is determined by a number of factors) you qualify for.

As a home buyer (or homeowner who is refinancing), you have plenty of options to choose from when it comes to your mortgage. When exploring the different types of mortgages out there, keep in mind your home cost, down payment, what you can afford to pay month-to-month, and how long you’ll live in your home.

Conventional loans are the most common type of mortgage. There are two types: conforming and non-conforming.

While not insured by the federal government, conforming loans meet the guidelines set by government-sponsored companies Freddie Mac (the Federal Home Loan Mortgage Corporation) or Fannie Mae (the Federal National Mortgage Association).

If you have strong credit, a steady income, and can make a down payment of about 5% or more, applying for a conventional, conforming loan is likely a good option.

Non-conforming loans do not meet borrowing criteria set by lenders, whether that’s because the amount is higher than the conforming loan limit or the borrower doesn’t have the standard amount of credit or collateral.

Jumbo mortgages are the most common type of non-conforming loans , and they exceed the loan limits set by Fannie Mae and Freddie Mac. In 2020, the maximum conforming loan limits are $510,400 for most counties, and $765,600 in certain high-value areas. You can explore the maximum loan limits across the U.S. using this map.

Jumbo loans are more common in affluent areas where homes are pricier. If the amount you need to borrow for you home exceeds the conforming limits, you’ll likely need to take out a jumbo loan.

To qualify for a jumbo loan , you’ll typically need a top-notch credit score (above 700), low debt-to-income ratio (below 45%), and must be able to afford a higher down payment.

Depending upon your personal situation, you might be eligible for a government-backed loan or non-conventional mortgage. The three types you may consider are a Federal Housing Administration (FHA), a United States Department of Agriculture (USDA), or a Veteran’s Affairs (VA) loan.

FHA loans are for people who don’t have the best credit or can’t afford a large down payment — only 3.5% is required — making them a good option for first-time homebuyers.

FHA mortgages require you to commit to a mortgage insurance premium (MIP) that you’ll pay for the life of the loan. (Unless you can put 10% down, in which case you’ll pay an annual premium for 11 years.) So, while the low initial payment is undoubtedly attractive, be aware that you may be adding thousands of dollars to your mortgage over time.

Managed by the Rural Housing Service, these mortgages are provided to qualifying borrowers in rural areas with low-to-moderate incomes. Some USDA loans don’t require a down payment and may offer below-market interest rates.

Whether Army, Navy, Air Force, Marine Corps, or Coast Guard (active duty or a veteran), if you’ve served our country, you are eligible for a Veteran’s Affairs loan. These mortgages are flexible, require little-to-no down payment, and have low interest rates.

If you’re planning on living in your home for a significant number of years, or you simply prefer the stability of knowing your interest is not going to change, a fixed-rate mortgage may be the loan you’ve been looking for. With a fixed-rate loan, the interest rate is locked in for the life of the loan, and because your monthly payment will stay the same, you can plan your budget for months and years ahead.

Fixed-rate mortgages typically come in 15, 20, and 30-year terms. Keep in mind, longer mortgage terms may mean lower monthly payments, but you’ll likely end up paying more overall in interest.

Fixed-rate mortgages are steady and dependable. Their counterpart, adjustable-rate mortgages (ARMs) are less predictable and can possibly be risky — but with the potential of big savings.

When you get an ARM, you’ll often have a lower interest rate than a fixed mortgage would offer for the first few years (usually between 3 and 7), which can make them attractive. But after that initial period, your interest rate could adjust repeatedly throughout the duration of your loan.

If interest rates rise, the cost of your monthly payments will increase with an ARM. (An interest rate hike may not seem like a big deal now, but it could cause your mortgage payments to become unmanageable in the future.) Likewise, if interest rates fall, your payments could decrease.

If you only plan to live in your home for a couple years, an adjustable-rate loan may not be a bad idea. You can enjoy the lower initial interest rate and move on to new home (and mortgage) before you rate is subject to change.

Ally Bank offers both  fixed-rate and adjustable-rate mortgages  — both with competitive interest rates and loan options tailored to your specific borrowing situation.

As a homeowner, you may come across several reasons for choosing to refinance. You may want to convert from an ARM to a fixed-rate mortgage. Or you could be seeking to pay off your loan faster, receive a lower interest rate, pull out cash from your home’s equity — and the list goes on.  Several scenarios can make refinancing worth it .

If you choose to refinance, you’ll likely pick between one of three common types: Rate-and-term, cash-in, and cash-out.

A rate-and-term refinance is just like the name implies: You adjust your interest rate, the length of your loan term, or both. You’d likely choose this if you want to convert from a 5-year ARM to a 20-year fixed-rate mortgage, or shorten your fixed-rate loan from 30 years to 20.

If you want to pull out cash from your home’s equity — this is often done to finance a major home project — you may opt for a  cash-out refinance . With these, you replace your existing mortgage with a larger loan. For example, if you owe $100,000 and refinance with a cash-out loan of $120,000, you are giving up $20,000 worth of equity in your house, but you walk away from the deal with that amount in cash. With this option, lenders generally require you maintain at least 20% equity in your house.

Conversely, a cash-in refinance can help you lower your mortgage by increasing the equity on your home (and reducing the amount of your loan balance). You can think of a cash-in refinance as sort of like making another down payment on your home. Doing so can make your mortgage more manageable on a monthly basis or allow you to qualify for a lower interest rate.

Potential homebuyers and current homeowners have a lot of options when it comes to selecting a mortgage. Finding the right one for you begins with knowing your financial situation. Once you’ve determined your budget and figured out which type of loan fits your lifestyle, you can start living happily ever after.