Few economic decisions in life are as personal as buying a home. When it comes to financing that home, the right type of home loan for one homebuyer might not fit another buyer’s needs. The right mortgage loan for you depends on various factors, including your income, credit score, financial situation and length of time you intend to live in your new abode.
Types of Home Loans
The mortgage process might seem a bit intimidating to the first-time buyer, but the basic type of home loans most people can consider falls into just three categories:
- Fixed-rate loans — If you lock in a rate when financing your home, you know exactly how much you will owe each month for the life of your mortgage. With a fixed-rate loan, that is true whether you opt for a 15-year or 30-year mortgage. Many people apparently appreciate the peace of mind of a fixed-rate loan, since it remains the top choice for the overwhelming majority of homebuyers.
- Adjustable-rate loans — Whether an adjustable-rate loan is right for you depends on your risk tolerance. These loans are initially cheaper than fixed-rate loans, but the rate adjusts on an annual basis. The downside of an adjustable-rate mortgage is that rising interest rates could cause you to pay more for your loan. If you do not plan to stay in your home for more than a few years, an adjustable-rate mortgage is often a good choice. On the other hand, if you do not refinance over time, that can add up to a significant amount of money.
- FHA loans — Established by the government in the 1930s during the Great Depression, Federal Housing Administration (FHA) mortgages offer lower qualifications, down payments and closing costs. The down payment for many buyers is just 3.5% of the purchase price. The FHA insures these mortgages, but buyers obtain them from traditional mortgage lenders. An applicant with less-than-stellar credit may be able to be approved for an FHA mortgage.
Other Types of Mortgage Loans
While the standard types of home loans are available for most buyers, only certain individuals may qualify for other types. Some mortgage loans are designed for short-term purposes to fill a buyer’s specific needs. By meeting the criteria, you may prove eligible for the following types of mortgage loans:
- VA loans — Active duty and veteran members of the military do not have to make down payments with VA loans. That is just one of the reasons this type of home loan is second to none for qualified applicants. In addition, VA loans do not require mortgage insurance and closing costs are lower. Standards for qualifying are relatively flexible. Because the VA backs these loans, the interest rates are lower than conventional mortgage rates.
- USDA loans — U.S. Department of Agriculture (USDA) loans offer 100% financing for moderate- and lower-income applicants seeking homes in eligible rural areas. An applicant’s income cannot exceed 115% of the median income for the area.
- Bridge loans — You want to buy or build your dream house, but you have not yet sold your current home. A short-term bridge loan, or bridge mortgage, bridges that gap between the time you sell your current home and purchase or build another one. Bridge loan terms seldom exceed one year, and interest rates are relatively high. Your present home serves as the collateral for the new dwelling. In most cases, you can finance up to 80% of the combined value of both properties. Once you sell your current home, you pay off the loan and then apply for a mortgage for the new property.
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Categorised in: Borrowing Tips
This post was written by David B. Coulter