When shopping for a home loan, there are many options. There are reasons to choose one loan over another, such as lower interest rates, or a lower down-payment. Depending on your financial situation, personal factors, and your comfort level, it is a lot to balance. Here is a summary of the major types of home loans available.
Adjustable Rate Mortgages
While most mortgage loans have a fixed percentage rate, an adjustable rate mortgage (ARM) has an interest rate that changes with the market. In general, ARM loans are fixed at first. After that, then the ARM cap will allow the interest rate to go up or down either annually or monthly. When considering an ARM, think about how high your monthly mortgage payment can become. Some homebuyers choose an ARM when they expect to be moving to a new home within a few years to save on interest payments.
A larger payment (a balloon) is required at the end of the loan term. So, for example, you could make payments based on a 30-year period but for a much shorter period, like 7 to 10 years. This type of loan can make sense, for example, if you know you’ll be inheriting a lump sum of money or are nearing retirement.
There are two types of conventional loans, conforming and nonconforming. Neither type is insured by the federal government and typically require mortgage insurance if you are paying a down payment less than 20 percent of the purchase price. Some of these loans only require as little as 3 percent down! For conventional loans within the maximum limits set by the Federal Housing Finance Agency are considered conforming. Those loans outside the limits are considered, of course, nonconforming.
Fixed Rate Mortgages
With terms of 15, 20, or 30 years, a fixed rate mortgage has a stable interest rate over the entire life of the loan. Many homeowners choose this option since it is budget friendly. Some do not choose this option because a longer-term loan can result in paying more interest, and the interest rate is usually higher than an ARM.
Government Insured Mortgages
For first-time home buyers, those with a small down payment, or less than stellar credit, a government-backed loan is a perfect opportunity for homeownership. The top loans in this category are FHA loans, USDA loans, and VA loans. Each have different qualities and opportunities, though a common reason to opt out of these loans is a slightly higher interest rate, mortgage insurance, or an overall increase in the cost of a mortgage.
Just like a new coat or car, choosing a mortgage should take a little time. Be sure to consider your needs, income, potential increase in income, and research each loan carefully. Many real estate and professional lenders are happy to help in the process and path in finding the right home loan.