What is the best type of home loan for you? The answer is different for everyone.
No two borrowers or home buyers have the exact same financial situation or background, so it’s up to you to choose a lender and mortgage loan that works best for you.
There are several types of mortgage loans that you may qualify for depending on your financial history. In this article, we will talk about the difference in each type of mortgage loans along with the advantages and disadvantages to find out which loan is best for you.
Fixed vs. Adjustable Interest Rates
Every mortgage comes with an interest rate, there are two different mortgage interest rates – a fixed rate or an adjustable rate. Getting the right interest rate on a mortgage can dramatically change your monthly payments over the life of the loan.
Fixed interest rates mean you’ll pay the same amount through the life of your loan (typically 15 or 30 years). Although your upfront costs may be more expensive, the terms are simpler to understand, and you can refinance if you want to take advantage of lower rates. Fixed rates are great for those who want stability and who plan to live in their homes for a long time.
Adjustable interest rates mean your interest rate can increase after a period of time. What attracts buyers to this option is the fact they start off with a lower interest rate and get approved for a higher loan. Adjustable rates are best for people who plan to sell the house or refinance their mortgage.
Compare the Different Types of Mortgage Loans
Before you decide which type of mortgage loan you should choose, you should first evaluate all of your options. Here are 5 different types of mortgage loans you should consider.
The most common type of loan for all buyers is a conventional loan. These loans are offered at fixed and adjustable interest rates and only require 3% down payment. Conventional loans are not backed by the government.
Conventional Jumbo loan
A jumbo loan is the most common type of nonconforming loan because it’s used to finance homes that are too expensive for a conventional loan. This type of loan is riskier for lenders so borrowers usually need to pay a larger down payment or have strong credit history.
FHA (Federal Housing Admin) loan
FHA loans are among the most popular, especially for first-time buyers. This type of loan appeals to lenders because if you can’t make your mortgage payment, the FHA will. Benefits of obtaining this type of loan range from small down payments, competitive interest rates, and lower closing costs.
To get this loan, you need to have a credit score of 580 or above, including a down payment of as little as 3.5%. If your credit score is lower than 580, you will need a 10% down payment.
VA (Veteran Affairs) loan
For veterans, surviving spouses, and active-duty military personnel, VA loans offer a great way to get into a home at a lower rate with NO down payment. This is the best type of loan. If you qualify for a VA loan, you should apply.
This program targets homes purchased in rural areas. The benefits are no down payment and a fixed mortgage. You will need a credit score of 640 or higher to take advantage of a USDA loan.
How to Choose the Best Mortgage For You
Applying for a mortgage can be a stressful process. There’s a lot of jargon to learn and types of mortgage loans to pilfer through, making it difficult to decide which mortgage loan is right for you. To make it as simple as possible, here are six steps to choose the best mortgage loan once you have your finances in order.
1.Figure out How Much you can Afford
Don’t put yourself in a financial position where you won’t be able to pay back the loan. Make sure you can afford the down payment and the recurring interest rate.
2. Evaluate your Options
Since mortgages are such a great financial commitment it’s important to consider all different types of mortgages and shop around between lenders for the best rates possible.
3. Weigh the Pros and Cons
Take a look at your financial situation and how each loan fits into your financial playbook. Do the advantages of the loan apply to you?
4. Understand Mortgage Rates
Understanding and utilizing interest rates can help make the choice for you. If you are staying in a home long term then you don’t want an annually increasing mortgage rate. If you are going to flip the property or are holding the home short term, then a lower initial interest rate that comes with a variable rate is the better choice.
5. Work with a Loan Officer or Mortgage Broker
A good loan officer or mortgage broker will be able to evaluate your financial situation and decide which loans benefit you the most.
If you would like help from a trusted mortgage broker, Loan Compass can help. We specialize in home loans, making it easy for you to find the mortgage that is best for you!
Speak with an experienced loan officer to learn more about mortgage loans and which type of loan you should choose.