Top 8 Types of Home Loans: Which One Is Right for You?
For most people, buying a home typically means using money by way of a home loan—one of the biggest financial steps you will ever take. With so many home loans making the rounds to choose from, it can become a daunting task. This guide simplifies the eight most prevalent forms of home loans, listing their various pros and cons to ease your decision-making process.
Understanding Home Loans
A mortgage, otherwise called a home loan, is an advance taken out by you the purchaser to buy your new property. You then agree to pay the loan back over a specific period (usually with interest). Home loans are so important to many home buyers as they will allow you to purchase a more expensive property by spreading the cost of this property over decades, making it affordable.
You may want a home loan to buy property or if you are refinancing, borrowing against the equity in your existing residence. While there are other loans meant for different purposes, it is depending on your current financial and long-term plans that directly impact just the right loan for you.
1. Fixed-Rate Mortgage
For good reason, the fixed-rate mortgage is one of the most simple and well-known home-loan products. As the name implies, a fixed-rate mortgage will have an interest rate that does not change throughout its life and lead to more predictable payments.
Advantages:
Consistent monthly payments allow for easier budgeting.
Protection against increasing interest rates
Disadvantages:
Higher interest rates at the outset than ARMs
Cons: Not as flexible if rates go down.
Who look forward to a fixed-rate mortgage?
If you are going to spend more years living in your house and want a stable expenditure, then fixed rate mortgage might be right for you.
The post Apply for Fixed-Rate Mortgage first appeared.
2. ARM stands for Adjustable-Rate Mortgage
You may also consider an adjustable-rate mortgage (ARM) which has a lower initial interest rate than the fixed loan but can be raised to another level after 3 or 5 years. Most often, an ARM will be fixed for a certain duration of time (e.g. 5 /7/ 10 years) prior to the rate is reviewed yearly based upon market problems.
Advantages:
Lower otherwise Initial Interest Rates
Ability to Reduce Payments When Interest Rates Are Down
Disadvantages:
Higher payments if rates rise
One of the largest problems in this industry is uncertainty surrounding budgetary concerns because plans are based off rates that could change drastically over time.
Who Should Consider an ARM?
Just make sure that if you buy with an ARM, either plan to sell or refinance before your rate adjusts (and within a relatively short period of time) or believe interest rates will drop.
Adjustable-Rate Mortgage Application
3. FHA Loans
FHA Loans: FHA loans are government-backed home mortgages designed to help make homeownership more attainable, particularly for first-time buyers or those with less-than-perfect credit.
Benefits:
– Less strict down payment requirements (minimum of 3.5%).
– Lower minimum credit scores
Limitations:
Mortgage insurance premiums (MIP) required.
Conforming loan limits are lower to allow for the more affordable living in rural farmer areas and HUD has several of these programs.
Eligibility Criteria:
For an FHA loan, you need a credit score minimum of 580 and at least 3.5% for your down payment. If you have a credit score of 500-579, an FHA loan is still available to anyone with a down payment at least10%
[Apply for an FHA Loan]
4. VA Loans
VA loans are available to veterans, active-duty service members and certain me members of the National Guard or reserves.6 These loans are offered through the Department of Veterans Affairs and come with lots of benefits for those who qualify.
Key Benefits:
– No down payment required.
– NO PMI (Private Mortgage Insurance)
– Competitive interest rates.
Drawbacks:
Limited to those who qualify; must have an approved plan of service.
VA funding fee is applicable but may be financed into the loan.
Eligibility Requirements:
Either you have served a minimum amount of time in the military and were honorably discharged or are married to someone who was killed on active duty.
[Apply for a VA Loan]
5. USDA Loans
The second is a USDA loan, backed by the U.S. Department of Agriculture for low- to moderate-income buyers in rural areas and small towns. Contingent upon the home location, these loans are for 100% financing and do not require a down payment.
Pros:
– No down payment required.
Lower interest rates available to qualified buyers.
Cons:
— Geographic Limitations Apply
– Income limits apply.
Who Qualifies?
The only eligibility requirements for this are your location and income. The house must be located in a qualifying rural area and your income cannot exceed the federal “moderate” limits.
[Apply for a USDA Loan]
6. Jumbo Loans
Jumbo Loans Are Ideal for borrowers seeking Financing Beyond the Standard Conforming Loan Limits set by the Federal Housing Finance Agency (FHFA). They are most prevalent in high-cost areas where property values exceed the baseline amount.
Advantages:
– Finance luxury real estate
– One lender may require private mortgage insurance (PMI), while another might not.
Disadvantages:
Higher interest rates than conventional loans.
– More stringent credit and income restrictions Is a Jumbo Loan Right for You?
Jumbo Loans are the best type for buyers buying high value homes that surpass Conventional Loan Limits.
[Apply for a Jumbo Loan]
7. Interest-Only Mortgage
For a set period of time, often 5 to 10 years An interest-only mortgage that permits you pay only the home mortgage loan rate without removing any input towards reducing your debt. At the end of this time, you begin paying both interest and principal so that your monthly payments go up.
Benefits:
– Lower initial payments.
Extra Money for Other Investments
Risks:
Adjustments: The monthly payment after the interest-only adjustment may increase significantly.
You will not be gaining any equity in the home during this interest-only period.
Ideal Situations:
This loan is ideal for borrowers who plan to sell or refinance before the interest-only period expires, and also those who have irregular income and are in need of lower initial payments.
You Might Be a Great Candidate for an Interest-Only Mortgage
8. Balloon Mortgage
A balloon mortgage has lower monthly payments in the beginning, say 5 to 7 years (short term) but you will have a large payment due at end of that time.
Pros:
– Lower initial payments.
Good for buyers planning to sell or refinance before the balloon is due.
Cons:
High risk if you don’t refinance or sell
Cons- It may be tough to afford the large final payment
Who Should A Balloon Mortgage Be Lean On?
It is good for buyers who know that they will not keep the loan too long.
(For more, see How to Get a Balloon Mortgage through either Fannie Mae or Freddie Mac.)Apply for balloon mortgage
How to Select the Best Home Loan for You
Depending upon your principal source of income; how much you make on a monthly basis, and credit score as well as long-term financial plans.
