January 23, 2023
For the majority of Americans, a new home is the largest purchase they ever make. If you’re considering buying a home, it’s important to understand what types of home loan options you have before you start shopping.
Not all home loans are the same, so do your research to ensure you choose the most suitable option for your financial situation.
The most common home loans include:
A fixed-rate mortgage is the most common loan option. As the name suggests, your interest rate stays the same throughout the life of your loan. This means your regular principal and interest payment won’t change. (However, if your mortgage has an escrow account for payment of property taxes and homeowner’s insurance, your escrow payment is subject to change.)
Many homeowners start out with a 30-year fixed, but there are other options such as 25-, 15-, and 10-year options.
Consistent payments make budgeting easy, and your loan will fully amortize over the term of the mortgage. However, you’ll pay a little bit more upfront for the peace of mind that you’re locking in an agreeable rate for the entire life of your loan.
Also known as an ARM, this loan gives you a lower, fixed interest rate for the initial 5, 7, or 10 years—and then after, your rate and monthly payment can change annually based on current interest rates.
ARMs generally have a low initial interest rate, which may initially make your payments smaller and more manageable than with a fixed-rate mortgage. ARMs can be less expensive over a long period of time but only if interest rates remain steady or move lower.
FHA loans are backed by the Federal Housing Administration, which is a government agency. FHA loans have more lenient qualifying guidelines than other conventional loans and are a great option for home buyers with a less-than-perfect credit score or minimal savings. With an FHA loan, you can put down as little as 3.5% at closing.
This loan is exclusively for veterans, active-duty personnel, reservists, National Guard members, and, in some cases, surviving spouses. This loan includes benefits such as no required down payments and the ability to buy with less-than-perfect credit.
VA loans allow buyers to put little to none down on their loan. Though this helps ease your pockets on closing day, you’ll have little equity in your home. VA loans are also more restrictive than other loans and can only be used for owner-occupied properties.
Not all lenders offer VA loans so it’s important to choose wisely when searching for a lender.
After you know what type of loan you want to use, it’s time to call your lender and get pre-approved. Your pre-approval will help you determine your budget for your home, so it’s best to do that before you start shopping. Reach out to a mortgage professional to get started!