If you’re beginning your home buying process, you’re probably thinking a lot about mortgage loans. Purchasing a house is a big financial decision. How you’re going to secure a loan to pay for it is a large part of that. It’s common to wonder which loan is the best – but it’s better to think, “Which one is right for me?”. To help you figure this out, here are four of the most common home loans you can secure.
Fixed-Rate Conventional Loan
When you secure a fixed-rate loan, the interest rate at the time remains the same throughout the life of your loan. That means your payment each month remains the same – it’s a predictable cost year over year. There are two main types of fixed-rate mortgages: 30-year and 15-year. The 30-year fixed-rate mortgage is the most popular type of home loan. Since it’s a longer-term loan, your monthly payments also tend to be lower. 15-year fixed-rate mortgages are often used for refinancing or buyers seeking to build equity fast. The downside of this type of loan is monthly payments tend to be higher.
Who is this right for? Homebuyers looking for predictable monthly payments and flexibility to pay the loan off faster when desired.
Adjustable-Rate Conventional Loan
An adjustable-rate mortgage is pretty self-explanatory: Unlike a fixed-rate mortgage, the interest rate will change periodically throughout the loan. The initial rate is set for a specific period, then adjusts following that. The initial rate is often lower than most other loans so that buyers can benefit from a few years of smaller payments.
Who is this right for? Homebuyers who intend to sell their home before the initial rate period is up, who plan to pay back their mortgage quickly, or who are optimistic rates will be lower in the future.
These mortgages are insured by the Federal Housing Administration (hence the “FHA” loan). These mortgages offer people the opportunity to purchase homes who otherwise might not have the option, but this type of loan does require insurance. People with down payments as low as 3.5% and credit scores around 580 can secure FHA loans to purchase a home.
Who is this right for? First-time homebuyers with lower credit scores or smaller savings (typically with a down payment of less than 20%).
These loans are backed by the U.S Department of Agriculture (USDA) and are part of a mortgage assistance program. USDA home loans are available to home buyers with lower incomes for their area and allows for zero down payment and below-market mortgage rates. Finance closing costs are rolled into the loan, and there’s no prepayment penalty. There are income limits based on location, so not everybody is eligible for this type of loan.
Who is this right for? Rural or suburban homebuyers who meet the USDA’s loan requirements.
Buyers in all income brackets have a lot of mortgage loan options. But as you can see, there is no one right answer for what type of loan is best for you. First-time home buyers with smaller savings might choose a different loan than a third-time buyer who can pay a larger down payment. While it’s helpful to work with an advisor who understands your financial situation, these basic descriptions can help you figure out which loan might be right for you.