What Is The Right Home Loan Option For Me?
No two buyers are alike – and no two mortgages are the same, either. The truth is that there is no right answer to the question “What is the right home loan option for me?” It depends on a number of factors; the following guide can help potential buyers understand the different types of loans – and which loan best fits their needs.
Fixed-rate mortgages, also known as conventional mortgages, are the most common type of loan home buyers take out. With this type of loan, buyers pay the same interest rate on the loan amount through the life of the loan, which is typically 15 or 30 years. These predictable interest rates are ideal for buyers purchasing a primary residence that they plan to stay in for at least five years.
Adjustable-rate mortgages, or ARMs, are loans that have an interest rate that changes or fluctuates over time. A typical ARM will offer buyers a low interest rate for an introductory period of two-five years; after this, the interest rate becomes adjustable – to a certain limit – and fluctuates based on market conditions. While an ARM is a bit of a gamble, it can significantly benefit homeowners in good market conditions or if they plan on quickly paying off a loan.
FHA, or Federal Housing Administration, loans were designed for low-to-moderate income families who would be otherwise unable to purchase a home. With qualifying credit scores as low as 580, FHA loans are ideal for buyers with steady income who may not quality for conventional mortgages. Buyers can put as little as 3.5% down with FHA loans, but these terms come at a price. Buyers must pay an upfront mortgage insurance premium of 1.75% in addition to their down payment as well as annual mortgage insurance of 0.85% of the borrowed amount. In addition, FHA loans are capped at $417,000 for most areas of the country, while cap in high-cost areas is $625,000; this can limit buying power.
VA loans are guaranteed by the US Department of Veterans Affairs and give qualifying veterans the chance to purchase a home with $0 down – and no mortgage insurance. VA loans have fairly stringent requirements; in addition to qualifying military service, buyers must have a credit score of 620 or higher and the home will require an additional special appraisal before closing.
USDA loans are another government-insured mortgage option; offered by the US Department of Agriculture, these loans are only available in areas with populations of 10,000 or less. Geared to encourage low-income families to purchase homes in rural areas, USDA loans can have 0% down payments. However, these loans charge an upfront mortgage insurance fee of 2% of the loan amount as well as an annual monthly mortgage insurance of 0.5%.
by Author, January. 30, 2020