7 Types of Mortgages for Home Buyers to Discover
In most cases, shopping for a house also means shopping for a mortgage. There are many loan options available, and each one is different and more likely to be a fit for different buyers. Most loans will fit into more than one category; for instance, someone may have a 15-year adjustable rate mortgage or a 30-year fixed rate mortgage, and either could be a jumbo or an FHA. Home buyers can learn the basics of each loan to help them choose the right one to fit their financial situation.
The most common and straightforward conventional home loan, fixed-rate loans have the same interest rate and monthly payment for the entire life of the loan. The most common terms for these loans are 15 or 30 years, and they can be great for home buyers who want predictability throughout the entire time they are paying off their mortgage. Additionally, fixed-rate loans can be great for those who plan to stay in their homes for several years, as they allow buyers to build up a predictable level of equity. The potential downside is that while borrowers will not be harmed by rising interest rates, they won't receive the benefit of falling rates either.
The rates typically start off lower for an adjustable-rate mortgage (ARM) than those of fixed-rate loans. However, after a set period of time—usually five or ten years—the interest rates will match current prime interest rates. Once a year, the rate will be adjusted. If interest rates go up, so will the homeowner's monthly mortgage payment. When rates go down, the monthly payment will as well. These loans are more accessible to people who have lower credit scores and can also be a good option for people who think they will sell and move before the fixed payment period of their loan is over.
Federal Housing Administration (FHA) loans are a great option for home buyers who may not have large savings for a down payment. Qualified buyers can put down as little as 3.5% because these are government-backed loans. FHA loans are fixed-rate and offered in 15- or 30-year terms. However, buyers will be required to pay mortgage insurance over the life of the loan.
The USDA Rural Development Loan is an option that can help people buy homes in rural areas. This loan requires no down payment, offers discounted interest rates, and is financed by the federal government. Buyers will be required to purchase mortgage insurance and must not have a debt load that exceeds their income by more than 41%.
Qualified veterans with U.S. military service may be able to get a Veterans Affairs loan. These loans are excellent alternatives to conventional loans because they do not require a down payment or mortgage insurance, meaning that buyers do not have to spend time saving for a home. Veterans will need 90 days consecutive service during wartime, 180 days during peacetime or six years in the reserves to qualify. There are also minimum requirements for the types of homes that can be purchased.
Buyers who are interested in luxury homes will need to find a mortgage that is built for this type of transaction. Jumbo loans are mortgages over a certain dollar amount; the limits will vary by location and are adjusted periodically to address changing home prices. These can come in fixed or adjustable forms and require high credit scores (typically 700 or more) along with a down payment.
An interest-only mortgage only requires payment of the lender's interest charge each month for the interest-only phase of the loan. The loan principle does not go down during the interest-only period, which typically lasts for seven to ten years. This can be an appropriate choice for borrowers who have income that varies from month to month and those who receive large annual bonuses. Borrowers will have to make periodic payments to get ahead on this type of loan and show substantial assets or a proven ability to pay in order to qualify.
No one mortgage option is going to fit every borrower. The right loan choice will depend on factors that include credit score, income, the type of home and whether the home is rural, urban or suburban. By thoroughly exploring each loan option and running some numbers to see what life will be like throughout the term of the loan, borrowers can choose the option that fits their situation best and allows them to fulfill their homeownership dreams.