What Are The Different Types Of Home Loans/Mortgages?
Many people dream of owning a home, but those who do not have enough money in savings to purchase a home outright may wonder if homeownership is within their reach. There are several types of home loans and mortgages available that can help people in different financial situations achieve this dream. Here is a look at some of the most popular ways of financing a home purchase.
A fixed-rate mortgage is a type of home loan that maintains the same interest rate throughout its life. This means that the monthly mortgage payment will always remain the same despite the state of the economy at large. Fixed-rate mortgages generally come with terms of 15 or 30 years, although some lenders offer more flexible term options.
With a fixed-rate mortgage, homeowners benefit from the predictability of a fixed monthly principal and interest payment, which allows them to budget their other expenses more effectively. However, with a fixed-rate mortgage, it is important to keep in mind that the interest rates may be higher than those on an adjustable-rate mortgage and you may need to pay more interest on a long-term loan. Nevertheless, fixed-rate mortgages are ideal for homeowners who intend to remain in their home for longer than five years and are uncomfortable with the potential for their monthly payments to change.
With an adjustable-rate mortgage (ARM), the interest rate will fluctuate in accordance with the market conditions at the time. Some adjustable-rate mortgages begin with a fixed interest rate during the first few years of the loan before changing to a variable interest rate for the remaining term. For example, on a 7-year/6-month ARM, the rate will be fixed during the first seven years before adjusting every six months following that initial period.
Many people are drawn to an ARM because there is the possibility of saving a significant amount of money on interest payments if the market conditions remain favorable throughout the mortgage term. The lower fixed rate that these loans sometimes offer during the first few years of homeownership is also attractive.
However, homeowners must keep in mind that their monthly mortgage payments could eventually become unaffordable and cause them to default on their loan, depending on market conditions. In addition, if their home’s value drops over time, it will be more difficult to sell or refinance before their loan resets. An ARM is a good option for homeowners who do not intend to remain in their home longer than a few years as it can allow them to save money on interest payments. However, they must accept the possibility that their payments could increase while they are still in the home.
For homeowners who wish to build a home, a construction loan can provide the necessary financing. Some homeowners opt to obtain a construction loan for the building project and then secure a separate mortgage for paying it off, while others choose a construction-to-permanent loan that wraps both types of loans together to streamline the application process and reduce the loan fees.
It is important to keep in mind, however, that homeowners typically must pay a higher down payment on a construction loan and will need to prove that they can afford to pay it.
Although the US government is not a mortgage lender, it can help certain groups of Americans to become homeowners. There are several types of mortgages backed by different government agencies.
A VA loan is backed by the Department of Veterans Affairs and offers members of the US military, whether they are veterans or on active duty, a flexible and low-interest mortgage. These loans do not require down payments, minimum credit scores, or mortgage insurance, and their closing costs are usually capped and can sometimes be paid by the seller, making this an affordable way to become a homeowner.
For borrowers who lack the ability to make a large down payment or have less-than-stellar credit, a loan backed by the Federal Housing Authority (FHA) may enable them to buy a house. Borrowers must have a minimum FICO score of 580 to be eligible for a 3.5% down payment, while those with a score of 500 may also be accepted if they can put 10% down on the home.
A USDA loan can help borrowers with low to moderate incomes purchase homes in rural areas as long as the home is situated in a location that is USDA-eligible and the borrower meets certain income limits. In some cases, a down payment will not be required, but there are fees involved.
Discuss Your Home Financing Options With Woodsboro Bank
To find out more about your financing options when purchasing a home, reach out to the experienced home mortgage professionals at Woodsboro Bank today.