Whenever the time comes to take out a mortgage and buy a home, the biggest concern is choosing which mortgage type is right for you. While conventional, fixed-rate mortgages are a reliable option that suits most people, there are many more options to choose from. These possibilities can help you save money, get a lower down payment, or even get a home despite having a poor credit score.
The Different Mortgage Types to Consider When Buying a Home
While there are numerous types of mortgages to choose from when buying a home, you might divide them into two informal groups; standard mortgages and specialty mortgages.
A standard mortgage includes conventional and non-conforming mortgage loans that any prospective homebuyer can look into getting. These consist of a down payment, monthly payments on the principal, and might include additional expenses such as private mortgage experience.
On the other hand, specialty mortgages have unique terms or are only applicable in limited cases, such as USDA loans for rural homebuyers.
Best Mortgage Types for Standard Home Buyers
When you decide to get a conventional mortgage, you’re going to need a down payment of at least 3% to 20%. Today, most homebuyers in the US have to save up a 5% down payment before qualifying for a loan. Once you have your down payment, the most significant decision to make is whether or not you’ll go for a fixed or variable rate mortgage.
Stability and Reliability: Fixed-Rate Mortgages
With a fixed-rate mortgage, your financial institution will guarantee a consistent interest rate for the duration of your mortgage term. This means that barring missed payments or other errors, your monthly mortgage payments will never increase. If you’re buying a home with a thin budgetary margin for error or work in a position where your income isn’t necessarily guaranteed, then this type of mortgage loan is ideal.
Long-Term Savings: Adjustable Rate Mortgages
With a variable rate mortgage, you and the bank will share the benefits and burdens of interest rates. If interest rates go down the road, then the interest rate on your loan will fall as well, potentially saving you hundreds of dollars each month. However, rising interest rates will increase the cost of your payments. This type of home loan generally entails paying less for your home in the long run, but the savings aren’t worth it if high interest rates will translate into real hardship for you.
Specialty Mortgage Types
If a 5% downpayment is out of reach, that doesn’t necessarily mean buying a home is not in the cards. A variety of government programs guarantee loans from qualifying mortgage lenders — one of which might be your ticket to homeownership.
Buying a Home with VA Loans
The Department of Veterans Affairs runs a program where it will sponsor a mortgage loan on generous terms. If you’re eligible, you can use it to buy a home even with bad credit and a low to nonexistent downpayment.
USDA Loans for Rural Areas
The United States Department of Agriculture (USDA) manages a loan program that enables low-income homebuyers to purchase qualifying properties in rural areas. While this loan product is only applicable if you intend to buy a home in a rural area, it can make homeownership possible for those who might never be able to buy a home otherwise.
FHA Loans for First-Time Homebuyers
The Federal Housing Association (FHA) offers loans to low or medium-income homebuyers. While it does require a down payment and special mortgage insurance, the downpayment is one of the lowest available at a modest 3.5% of the loan amount.
Interest-only loans involve not paying down your home loan for several years and only making interest payments. This translates into an initial period of low monthly costs and considerably higher expenses over the lifetime of your loan. This mortgage type isn’t suitable for most people but is worth considering if you’re in a position to invest your temporary savings.
If you’re looking to purchase a residence in a pricier neighborhood, you may discover you can’t get a large enough loan to buy your dream house. However, with a jumbo loan, it may be possible. Conforming loans, typically sold to Fannie Mae and Freddie Mac, must adhere to limits and requirements set by these government-sponsored giants. Jumbo loans, however, are not and can be obtained via private lenders.
Want to Learn More About Which Mortgage Type Is Right for You? Turn to Loan House!
If you feel like you need more help choosing the ideal mortgage, you’re in the right place. For more information about mortgage finance options or how to follow mortgage rates, reach out to the real estate experts at Loan House today!
Reach out to Loan House today to find the answers to all of your home loan and real estate questions.