Types of Loans
Types of Loans – What You Need to Know Before Buying
There are many different types of loans available for your home purchase. The right loan product for you will depend on the type of property you are purchasing, property condition, your credit history, your budget and savings for a down payment, and the length of time you plan on owning the home.
A Fixed-Rate Mortgage
Allows you to lock in an interest rate so your monthly payment will stay the same over the life of the loan (only slightly changing with tax & insurance changes).
- A 30-year fixed-rate mortgage offers a lower monthly payment for the loan amount (for this reason, it’s more popular than the 15-year option).
- A 15-year fixed-rate mortgage typically offers a lower interest rate but a higher monthly payment because you’re paying the loan amount off faster.
Adjustable-Rate Mortgage (ARM)
Good if you plan to live in a home for a short time or you expect your income to go up to offset potentially higher future rates.
- Adjustable-rate mortgages have a reputation for being complicated. As the Consumer Financial Protection Bureau advises, make sure to read the fine print.
- Different lenders may offer the same initial interest rate but different rate caps. It’s important to compare rate caps when shopping around for an ARM.
- Has caps that protect how high the rate can go.
- Offers a lower interest rate than a fixed-rate mortgage for an initial period of time — maybe, five or seven years — but the rate can fluctuate after the introductory period is over, depending on changes in interest rate conditions.
Which fixed-rate or adjustable-rate mortgage you qualify for introduces a whole host of other categories, and they fall under two umbrellas: conventional loans and government loans.
Conventional Loans
Originated in the private sector, and is not insured by the government.
- 0% down with down payment assistance programs.
- Very competitive interest rates.
- Renovation Financing options are available from 5% down.
- 3% Down payment to qualify.
- Often a credit score of 620 or above.
Government Loans
Originated in the private sector, but is insured by the government.
FHA LOAN
- 0% down with down payment assistance programs.
- FHA 203K Renovation financing loans available.
- You must pay an upfront mortgage insurance premium (MIP) and an annual premium of 0.55%. Currently, the MIP is 1.75% of the loan amount ($1,750 for a $100,000 loan). This can be paid upfront at the closing or can be rolled into the monthly mortgage payment.
- Low down payment of 3.5% with minimum credit score of 580 or sometimes lower.
VA LOAN
- No mortgage insurance.
- The VA only allows lenders to charge 1% maximum to cover the costs of originating and underwriting the loan, so you save money at closing. There is, however, an additional upfront, one-time funding fee of 2.15%.
- 0% down payment.
- Available to active or retired military (or a veteran’s surviving spouse).
USDA LOAN
U.S. Department of Agriculture & Rural Development
- Upfront mortgage insurance fee of 1% of the loan amount and an annual mortgage insurance premium of 0.35%.
- Lenient credit score requirements.
- Down payments can be as low as 0%.
- Lower interest rates than non-USDA loans.
- Limited-income homebuyers in towns with populations of 10,000 or less, or that are “rural in character,” meaning that some areas that now have bigger populations are grandfathered in.
Shop Around for a Mortgage
Now that you have a general idea of the different types of loans available for your home purchase, it’s important to shop around. There are many types of lenders as well. Starting with a mortgage broker is usually a good choice because he or she can help you compare lender’s rates and terms. Be sure you have all the required documentation compiled to get pre-approved for a mortgage.
