Buying a house can be a grueling task. Not only do you have to choose the property carefully and take into consideration endless factors, but you also have to get the money for it. There are so many types of mortgage loans out there that grasping them all can get overwhelming. Choosing the wrong option can have dire consequences, so it is important to do a thorough research before committing to anything and signing any papers.
We are going to tackle the most common options and explain them to you.
The first criterion on which mortgage loans can be classified is the type of rate, which can be adjustable or fixed.
Adjustable-rate mortgages (ARM) will have an adjustable interest rate, meaning it will modify periodically, after a fixed period of time (from 1 month to 10 years). During that initial time, the rate will remain constant and it will usually be below the market, but after that, it will increase (usually once/year). Interest rates can double in a few years. In time, adjustable rates can exceed the going rate for a fixed-rate loan. Their main advantage is that they have really low initial payments, but they are also unpredictable, thus your monthly payment may fluctuate a lot.
Fixed-rate mortgages are pretty self-explanatory. The rates remain the same throughout the entire time of the loan. The biggest advantage here is the fact that you can’t be affected by sudden increases in your monthly mortgage rates. On the other hand though, if interest rates are high, this type of loan becomes too expensive.
As a general guiding line, adjustable-rate loans are suitable for borrowers who have lower credit scores or intend to move before their fixed-rate period expires.
Fixed-rate mortgages are better for more stable people, who don’t want to move and like everything to be predictable.
Another classification for home loans is conventional or government-insured loans.
Conventional loans are the ones that are not backed up/insured by the government. They can be conforming or non-conforming loans, depending on whether they meet the requirements set by government sponsored enterprises such as Fannie Mae or Freddie Mac, who basically purchase loans from lenders and then sell them in the secondary market, on Wall Street, to investors. Conforming loans have to fall into their guidelines, like their set loan size limit (usually $417,000; any loan below it is considered conforming, any loan above it is considered non-conforming or jumbo).
Government loans: the most common ones are the FHA (Federal Housing Administration) loan and the VA (Veteran Affairs) loan.
FHA loans are best suited for first-time home buyers. It is easier to qualify for them than for conventional ones and they have low down payments (3,5%).
VA loans are backed up by the Department of Veteran Affairs. They are only available for people who were in the military service as well as for their families. Veterans can get loans easier and the loans usually come with no down payment at all.