Buying a home, especially your first home, is very exciting. However, it can also be overwhelming and expensive. On average, homeowners spend $200,000 to buy a house. Getting a home is not something you want to plan and get at the last minute.
You should take the time to compare home loan types and how much you can afford to bring to the table (in down payment). Doing this can help you determine what homes you can afford and which you may receive the most savings in which can reduce the overall expense.
You probably are not aware of there are various types of home loans asides. Keep reading to learn how many there are so you can make the best home purchase.
1. Conventional Mortgages
Conventional mortgages are the main type of mortgages people know and use. Those who are ready to buy a primary, secondary or investment property often opt for this.
The benefit most people like about conventional mortgages is that overall borrowing costs tend to be lower compared to other mortgages. This is still true even during times the interest rate might be more. You could sign off on a house with as little as 3% as your down payment when you get a loan with Freddie Mac Fannie Mae.
If you put down less than 20%, you will have to pay for private mortgage insurance (PMI). The good news is that you can cancel this once you do put down 20%. Individuals who have a credit of 620 or more, as well as stable employment and income history, will find this loan most ideal.
2. Government-Insured Mortgages
While the government is not a direct lender in mortgages, they do have a strong influence in helping people get homes. There are three types.
The department of Veterans (VA) helps those who serve (active) or who have served (veterans) in the US military. No down payment is required and no PMI is charged. Those with a VA loan often do not pay closing fees.
These loans are backed by the Federal Housing Administration (FHA) and make the dream of owning a home more than possible for those unable to come up with a large down payment or have good credit. You should have a score of at least 580 and be able to put at least 3.5% down. Those who can put 10% down with a score of 500 can also qualify.
The US Department of Agriculture (USDA) helps those with middle to low-income purchase a home. You will need to meet specific income and location requirements. No down payment is needed for some borrowers.
3. Adjustable-Rate Mortgages
Adjustable-rate mortgages, or ARMs, have interest rates that fluctuate depending on the market. Overall, the interest rates do remain the same for a few years. The best home loan broker in your area can help you find an ARM that has a limit on how high your interest rate can get. This way, you are not in a financial bind when the interest rate increases.
4. Fixed Mortgages
Fixed-mortgages do not change in regards to the cost of interest for the duration of the loan. No matter how long or short your loan is or how slow or quick you pay it off, the interest doesn’t budge. It is great for those who want a stable, more precise way of budgeting their expenses.
5. Jumbo Mortgages
Jumbo mortgages are conventional types of mortgages with non-conforming loan limits. Non-conforming loans are often under homes where prices exceed federal loan limits. As of this year, it is $510,400 for a single-family home. Those who live in higher-cost locations may have a limit of $765,600.
You often will not see jumbo loans or get an offer for it unless you do live in areas that have a higher cost-of-living. There is a lengthy documentation process you will have to complete in order to qualify.
For example, you cannot have a debt-to-income ratio beyond 45%. You will also need a credit score of at least 660, although 700 is normally what lenders require. What that said, interest rates are more competitive than conventional loans.
6. Interest-Only Mortgages
When you have an interest-only mortgage, you pay only on the interest of the loan for a certain amount of time. When that time is up (after 5-7 years), you will see an increase in your monthly payments because the principal loan is back.
One thing to keep in mind is that you will not make equity as quickly as you may want because you only pay interest for the first few years. It is an optimal choice for those who can sell or refinance later or are able to afford the monthly increase.
7. Reverse Mortgages
When you buy a house, you typically own more of the property over time, but not with reverse mortgages. You may find this odd, but there’s a pro to this. Senior homeowners, for example, are able to supplement their limited income when they borrow against home equity. The result
is that you will enjoy tax-free monthly payments or a sum of money from your lender. Your lender pays you.
8. Mortgage Term Types
It helps to be aware of the available mortgage terms you can choose from. They range from 15 years, 30 years, (standard) or 50 years.
With a 15-year loan, you can pay off your home fast and pay lower interest fees. 30-year mortgages will have higher interest rates, but you will have lower monthly fees. The 50-year mortgage has lower monthly payment fees, but they also have the highest interest rates.
Knowing Home Loan Types Will Help You Make the Smart Choice
When most people think about buying a home for themselves, they often only think about the traditional method. This does work for millions of homeowners, but it is not the only thing that does. There may be other options that will work better for you.
This is why it’s helpful to be aware of the home loan types so you can make the most informed decision. You could save hundreds, thousands, or tens of thousands in interest when you take the time to plan the best fit.
If you found this article helpful, you can read more articles like this as well as business and finance topics on our website.
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