When it comes to finding the perfect home, it can be tricky to navigate what kind of mortgage you’re willing to commit to or what different types of home loans there are available. We’re here to break down your options for you and make buying a home as easy as possible.
Fixed vs. Adjustable
When it comes to home loans there are two types of mortgages; a fixed-rate or an adjustable-rate. A fixed-rate is where the loans have the same interest rate from the time you get them until the time you pay them off. An adjustable-rate is where the interest rate will change or adjust from time to time as you pay off the loan. Typically, adjustable rate mortgages, or ARMs, will change every year after a short-fixed period.
Each type of loan has pros and cons, but most of them depend on the market. If the market rates soar, and you’re locked into a fixed rate mortgage you have nothing to worry about as your rates will stay the same. If you have an adjustable rate mortgage, your rates might climb, making your payments, or interest, higher.
But if you have a fixed rate and the rates plummet, you’re paying more than the market average. This is where someone with an ARM would benefit from the flexibility of their loan, as their rates would dip along with the market.
Government or Conventional Loans
Then you’ll have to decide if you want to use a government issued home loan or a conventional, or regular kind of home loan. A home loan that is conventional isn’t insured by the government in any way.
Types of loans that are issued by the government are FHA loans, VA loans, and USDA/RHS loans.
FHA loans are part of a mortgage insurance program, and are available to all kinds of buyers not just first-time buyers. Essentially the government is insuring the lender against losses that they might have as a result of borrowing money. This type of loan is managed by the Department of Housing and Urban Development. This kind of loan lets you put lower payments down, as low as 3.5 percent, but you will have to pay for mortgage insurance and that can increase the size of your monthly payment.
If you’ve been a military service member or a family member of one, you might qualify for a VA loan program. These types of mortgages are also guaranteed by the U.S. Department of Veteran Affairs or the VA. The VA will reimburse the lender for any losses that result from borrower default. The primary benefit of this loan is that veterans and their families can receive 100 percent financing for the purchase of a home, which means no down payment at all.
USDA or RHS Loans
This type of loan is managed by the Rural Housing Service, which is part of the Department of Agriculture. It’s for rural residents, who have a steady low or modest income, but can’t obtain adequate housing through other financing. It’s more dependent on the income and how it compares to the adjusted median income of the rural area.