In 2018, it's expected there will be 3% more sales compared to those made in 2017. If you're planning to purchase a home this year, you know just how big of a financial decision this is. The mortgage loan you choose will be around for at least 15 years, so it's important to know what options are available as well as which one is most suitable for you.
Keep reading to learn about 5 different types of homeowners loans.
1. Fixed-Rate Loan
A fixed-rate mortgage loan is one that has the same interest rate throughout the entire life of the loan. Most lenders offer the option for a 15 year or 30 year fixed rate loan. A 15 year loan means a higher monthly payment but you'll pay more money towards principal and less towards interest. These loans also tend to have a lower interest rate when compared to their 30 year counterpart.
A 30 year fixed rate loan is the most common option. It offers a low monthly payment a rate that never changes. Because of the lengthy term, borrowers tend to pay a lot of money towards interest so finding the lowest interest rate is ideal.
2. Adjustable-Rate Mortgage (ARM)
As the name says, an adjustable-rate mortgage is one with a changing interest rate. For the first five years, a 5/1 ARM offers an extremely low interest rate which saves borrowers money up front. After five years, the interest rate can increase or decrease on a yearly basis. This type of mortgage loan is best for homeowners who are looking to sell or pay off their mortgage in five years or less.
While a 5/1 ARM saves a lot of money initially, homeowners will eventually face an increased rate which means a larger monthly payment. Rates change depending on market conditions, which we all know can change in a second’s notice.
3. FHA Loan
Ever since 1934, the Federal Housing Administration (FHA) was created to make it easier for certain prospective homeowners to be able to get approved for a mortgage. With FHA loans, the loan is insured by the government in the event of the borrower defaulting. This makes the mortgage much less risky for lenders. This means less stringent requirements for future homeowners.
FHA loans are most popular amongst first-time homebuyers. This is because the loan doesn't require a super high credit rating and the down payment is only 3.5% versus the 10% for a conventional loan.
Not only does FHA offer low interest rates for mortgage loans, it also offers low home improvement loans interest rates. This is beneficial for buyers who purchase a fixer-upper or a home that could use a little TLC to make it more livable.
4. USDA Loan
If your idea of a dream home involves living in a rural area, you may quality for a USDA loan. This type of loan, which is offered by the U.S. Department of Agriculture, provides a no down payment mortgage option for homeowners looking to purchase a home in rural areas throughout the country.
While you may think that rural means farmland and ranches, the program covers a vast area of the U.S. In fact, the USDA eligibility map indicates that more than 90% of the country is eligible for this type of loan.
To qualify for a USDA loan you must:
- Purchase in a designated rural area
- Have a credit score of 640 or higher
- Meet income eligibility requirements
Similarly to the FHA loan, the USDA loan is ideal for first-time homebuyers who want to live in a rural area. The low interest rates combined with no down payment is ideal for younger buyers who want to own a home but don’t have the cash to use a conventional loan.
5. VA Loan
If you're a member of the military or a veteran, you may qualify for a VA loan. You will need to receive a Certificate of Eligibility (COE) from the U.S. Department of Veterans Affairs to verify to the lender that you're eligible for this type of loan. This type of loan is also available to surviving spouses of U.S. military members.
VA loans offer a host of benefits including low interest rates, 100% financing, no down payment, and no mortgage insurance. Without having to pay PMI, you can expect huge savings throughout the life of the mortgage. There are also other benefits for choosing a VA loan including housing grants, property tax reductions, and more.
Becoming a homeowner is one of the most exciting yet scariest decisions you’ll ever make. Since homes often cost hundreds of thousands of dollars, it’s important that you choose the right mortgage option from the get-go. Be sure to research the five options in this list as well as others to determine which option for contractor financing is best for you.
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