If you’re shopping for a home, odds are you should be shopping for a home loan as well—and these days; it’s by no means a one-mortgage-fits-all model. For that reason we bring you today these six common home loan types
Where you live, how long you plan to stay put, and other variables can make certain home loans better suited to your circumstances; and choosing wisely could save you a bundle on your down payment, fees, and interest.
To learn about all your options, check out these six common home loan types available to buyers and whom they’re suited for; so you can make the right choice.
The most common type of loan, a fixed-rate loan prescribes a single interest rate — and monthly payment for the life of the loan, which is typically 15 or 30 years.
Right for: Homeowners who crave predictability and aren’t going anywhere soon. The rise and fall of interest rates won’t change the terms of your loan; so you’ll always know what to expect. That said, they’re best for people who plan to stay in their home for at least a good chunk of the life of their loan; if you think you’ll move fairly soon, you may want to consider the next option.
With adjustable-rate mortgage loans (ARMs), the rate will fluctuate—moving both up and down—based on market interest rates. There is also a hybrid option, where the loan has a fixed rate for a specific amount of time, and then, beyond that, the rate adjusts annually.
ARMs typically start off with a lower rate so they can be appealing, specifically for first-time homebuyers and other buyers on a strict budget. However, because rates rise over time, home owners could find themselves unable to pay later.
Right for: Home buyers with lower credit scores. These loans are also great for people who plan to move and sell their home before their fixed-rate period is up and their rates start vacillating.
A conventional mortgage is a home loan that’s not insured by the federal government. There are two types of conventional loans: conforming and non-conforming loans.
A conforming loan simply means the loan amount falls within maximum limits set by Fannie Mae or Freddie Mac, government agencies that back most U.S. mortgages. On the other hand, loans that don’t meet these guidelines are considered non-conforming loans. Jumbo loans are the most common type of non-conforming loan.
What do you think about these six common home loan types until now? If you need more information we invite you to check 4 Points to Consider Before Buying a Property
Right for: They are ideal for borrowers who have good or excellent credit and good debt-to-income ratio. Such loans typically require down payments, closing costs, mortgage insurance, and points; so buyers have to bring a chunk of cash to closing.
While it is easier to qualify for a conventional loan, buyers need excellent credit to receive the best interest rates.
FHA loans are insured by the Federal Housing Administration, a government agency within the Department of Housing and Urban Development (HUD).
Borrowers with FHA loans pay for mortgage insurance, which protects the lender should the borrower default on the loan. The insurance increases the size of the borrower’s monthly payments. The lender must be FHA-approved.
Right for: Home buyers with meager savings for a down payment. These loans come with several caveats. First, most loans are limited to $417,000 and don’t provide much flexibility: Rates are typically fixed, with either 15- or 30-year terms. Buyers are also required to pay mortgage insurance—either upfront or over the life of the loan—which hovers around 1% of the cost of your loan.
VA loans are offered to military service members and their families and backed by the U.S. Department of Veterans Affairs. Should a borrower default, the VA will reimburse the lender for any losses.
Right for: To qualify for a VA loan, borrowers need suitable credit, sufficient income, and a valid Certificate of Eligibility (COE). To obtain a COE, the borrower (or his or her spouse) must not have received a dishonorable discharge and must meet specific service requirements.
A huge benefit is that borrowers can receive up to 100 percent financing; so they aren’t required to make a down payment.
Well, this is the last point of our six common home loan types; So let’s do it! USDA Rural Development loans are designed for families in rural areas. The government finances 100% of the home price—in other words; no down payment necessary—and offers discounted interest rates to boot.
Right for: For rural borrowers who have a steady but low income and are unable to obtain adequate housing through conventional financing; the USDA offers a loan program that is managed by the Rural Housing Service (RHS).
If you need financial advising or you want to schedule a call, please contact us; we are ready to help you today.