Home loans, which one is right for you?
If you’re shopping for a new home, odds are you’re shopping for a home loan with a low-interest rate too.
If you are like many first-time home buyers, you may be just realizing there is more to a home loan than you ever thought.
You may even be overwhelmed by so many types of home loans made available by lenders.
Getting a mortgage can be a huge undertaking and pretty frankly, nerve-wracking.
But that’s ok. You are not alone with the feeling.
It’s actually pretty typical for first time home buyers to be overwhelmed. We are all on the same boat.
While getting a mortgage to buy a first home is quite a responsibility, you are starting it off the right way.
Getting familiar with different types of loans first is a huge step in the right direction.
This is because different home loans are available to borrowers with different qualifications.
So the first step in getting a loan is to know your options and what’s best suited for you.
Things like your veteran status, good credit score and can qualify you to more loans. While other things like your home price can widen or narrow your options.
Choosing your home loan wisely can save you a bunch on the down payment, interest, and even fees – no doubt.
And more importantly, it can help you make sure you can afford every mortgage payment for years to come.
If you are ready, let’s dive in.
Here are 7 common mortgage loans for first time home buyers.
1. Conventional and Fixed Rate Mortgage
A conventional fixed-rate home loan is a type of “fixed-rate” loan that won’t fluctuate for the life of the loan. They are considered a safe bet type of loans because of their consistency. Your monthly loan payments won’t go up or down. They’ll simply stay the same as they are fixed.
A conventional fixed-rate mortgage is generally your standard mortgage. They are typically available in 10, 15, 20 and 30-year terms. Sometimes they go up to even 40.
But 15 and 30 years are the most popular and common conventional fixed mortgage loans.
2. Interest-Only Mortgage
An interest-only mortgage gives you the option during the first 5 or 10 years to pay only the loan interest.
Once the interest-only period expires, you begin paying both the principal and interest. This can be a great option for those who are not planning to live in their home for longer than 5 to 10 years.
Many borrowers also intend to refinance their loan once the term is over. Or else, they make a sizable lump payment.
3. Adjustable-Rate Mortgage (ARM)
There are many different types of adjustable-rate mortgages or ARMs.
The basic and common idea is that their interest rate changes over time throughout the life of the loan. With this type of loans, you need to expect fluctuations in your interest rate as the market changes.
One of the most common ARMs is called the 5/1 loan. With this loan type, your interest rate stays the same for the first five years. The remainder of your loan, the rate is free to change and fluctuate.
Again, this loan can be an option if you plan to sell your house within 5 years or so.
4. FHA Loans
FHA Loans are loans guaranteed by the Federal Housing Administration. And they are managed by the Department of Housing and Urban Development (HUD).
These types of loans are often marketed to first-time home buyers. Yet, they’re actually available to a variety of home borrowers.
These are mortgages guaranteed by the Federal Housing Administration. What it means is that they come with built-in mortgage insurance. It’s protected against the possibility of not being able to repay the loan.
But that’s not the only draw.
The main advantage of an FHA Loan is its low down payment requirement. And it allows low-credit borrowers to access a mortgage.
You can put as little as 3.5% down on the purchase price of your home with an FHA mortgage. However, in exchange for this privilege, you’ll need to get mortgage insurance for the life of your loan.
Do you want to buy a home but don’t have an excellent credit score or a huge amount of money for a down payment? An FHA home loan mortgage might be a good way to get into homeownership.
5. VA Loans
VA loans are a no money down mortgage option mostly available to Veterans. But if you are a service member or select military spouse, you may qualify for one too.
This loan is designed to make easier for veterans of the U.S. armed forces, and sometimes their spouses, to buy homes.
Unlike other conventional loans, they don’t require a down payment. They are also guaranteed by the Department of Veteran Affairs.
They’re issued by private lenders, such as mortgage company or bank.
6. USDA Home Loan
The USDA home loan is a zero down loan program that is designed to help families in rural areas.
It’s a 90% government-backed home loan that lends 100% of the home price to borrowers. It’s available through approved lenders with no down payment.
USDA home loan It’s one of the least known government mortgage assistance programs. But it’s one many homebuyer can take advantage of as long as they meet the USDA criteria.
To qualify, you must be purchasing a home in a USDA defined rural area. If you have a home you are interested in, you can check the address here to see if it’s eligible.
Besides the geographical qualification, there are also income guidelines and credit check. As for the home price, your loan amount cannot exceed 41% of your income.
Also just as the FHA loan, you will be required to purchase mortgage insurance.
To qualify, review the USDA loan requirements here and check to see if any of your local lenders can assist you.
7. Jumbo Loan
A jumbo loan is a type of large home loan that exceeds the limits of the Federal Housing Finance Agency.
A loan offered for luxury property transactions is often classified as jumbo.
Unlike conventional mortgages, jumbo mortgages are too large for the government to guarantee. For their large size, they are not eligible to be purchased or securitized by Freddie Mac or Fannie Mae.
Since this shifts more risks to lenders, an interest rate for jumbo tends to be higher.
Getting a jumbo loan may also mean you have to provide more to qualify. You lender may require more cash reserves, a higher down payment, and better credit.
The exact loan amount that defines jumbo changes with time and differs by cities. But for most places, a loan over $484,350 is considered jumbo as of 2019. This is more than $30,000 higher than the 2018 limit of $453,100.
For many metropolitan areas, the baseline is set 150% higher, at $726,525.
In highly competitive real estate markets, jumbo mortgages are common and even inevitable. But if you are lucky enough to find your dream house below the baseline, you may be able to score a far better interest.
Speak with your local lender to learn for more bout a jumbo loan if are financing a home around the cutoff line.