What Type of Home Loan is Best for Me?
All loans are considered conventional loans, with options for fixed rates, adjustable rates or a combination of the two, unless they are a government loan. These types of loans are in a separate category.
Fixed Rate Mortgages
A fixed rate mortgage is just as it sounds. You apply for a mortgage and are accepted at a certain interest rate, within the spectrum of current interest rates, and this will remain your interest rate for the life of your loan.
A fixed rate home loan often sounds more desirable because there is no chance the rates will go up on the borrower. There are downfalls, though, including the chance of being stuck with a high interest rate if the rates go down at a later date. At the current time, interest rates are fairly low, so it is a good time to go with a fixed rate loan, although it is difficult to say whether the rates will continue to drop or go back up. It is also a good idea to have homeowners insurance anytime you are going to buy a home.
Adjustable Rate Mortgages
An adjustable rate loan means that your loan will fluctuate with market value, having the ability to go up or down, in a similar fashion as your credit card interest rate. Of course, the big concern with ARM loans is that your interest rate will go up, but the benefit is that you have the opportunity for your interest rate to go up over the life of your loan.
Many ARM loans use something called 3/1 or a 5/1, meaning that the adjustable rate stays fixed for a period of three years or for five years. This eliminates its ability to go up on a monthly basis, which could be overwhelming to a borrower. Another option is a balloon ARM, which means that the loans will remain fixed for a certain period of 3, 5, or 7 years and then the mortgage rates will go up according to interest rates at the end of that period. After the allotted time period of 20 or 30 years, the remaining amount on the loan will need to be paid off in a lump sum though.
Government Loans
The most common government home loans include Veterans Affairs (VA) loans and Federal Housing Administration (FHA) loans. Usually FHA loans are funded by government agencies such as Fannie Mae or Freddie Mac.
VA loans are available for current military members or veterans. This type of loan is for someone looking for a modest home, with a cap usually set around $200,000 depending on the current market area. One of the benefits of this type of loan is that they are available with little to no down payment, although this may require a larger amount at closing.
FHA loans have statutory limits for different market areas, with higher limits set for high cost of living areas. Qualifications for an FHA loan depends on income by area and cost of living, as well as the number of family members. If able to qualify for this type of home loan, there are lower down payment requirements and the qualifications for a conventional home loan are usually not as strict.