If you’re considering buying a home, now is a great time to be in the market. The Federal Reserve’s recent decision to incrementally increase rates means the near-historical low interest rates of the past few years is coming to a close. Interest rates are expected to be over 4 percent in a short time and with home prices rising, the environment creates a great incentive to lock-in your housing cost and secure a substantial asset. Chances are, if you’re in the market to buy a home, you’re also having to shop mortgages. When your finances are ready to apply for a home loan, you should know about the most common types of mortgage products.
Most Common Types of Home Loans
You should also know that the type of mortgage that’s right for you depends on more than what you can afford. How long you plan to live in the home before resale and other variables must be taken into account. The home itself will also play a key role in your mortgage decision. For instance, if you get a great rate, put down a good down payment, but, have little cash left over after closing, you can still make small improvements that have a big impact.
“It may take a little time to understand all of your loan choices and figure out which one is the best fit for your situation. We’ll help you gain an understanding of the loans that are available and give you the knowledge to make decisions based on your best interests. You should have an idea of the type of loan you want – but you need to know the type of loan you don’t want.” —MyFICO.com
Some homebuyers choose to go the fixer-upper route, while other prefer move-in ready. Regardless of the home type (single family, condo, townhouse, or villa), you’ll need a mortgage that’s right for you and your particular financial situation. Of course, the more you know about the types of home loans, the better decision you’ll make. For instance, you could find one with a low rate, but, learn you need to pay points upfront to qualify. Here are the most common types of home loans available today:
- Fixed-rate mortgage. The most recognizable type of home loan is the fixed-rate mortgage, and, for good reason. These have terms ranging from 10 years, to 15 years, to 20 and 30 years. What’s ideal about fixed-rate mortgages is that you lock-in the cost of your housing. In addition, short terms generally mean better rates and quicker amortization, providing equity at a faster pace. If you buy at the lowest end of your budget, you’ll also be able to put more toward the principal.
- Adjustable-rate mortgage. While these mortgage products got a bad reputation during the national housing downturn, they are great for buyers will less than stellar credit and offer rates lower than fixed-rate home loans. Generally, the low rate is locked-in for the first five or ten years, but, then can adjust up or down, depending on key rates. ARM’s are well-suited for buyers who will either sell before the adjustment period, or, who will refinance to a fixed-rate in three or four years.
- FHA home loan. While some mortgage products require a down payment ranging from 10 percent to 20 percent, a Federal Housing Administration loan has just a 3.5 percent down payment requirement. However, the amount of FHA loans is limited, typically to under $417,000 and borrowers must private mortgage insurance. These loans generally have 15 to 30 year terms.
- VA home loan. A veteran’s administration loan is an option for current and former service members, but these have restrictions. Among them are the type of home you can purchase, which must comply with “minimum property requirements,” which means no fixer-upper properties. These have little or no down payment requirements and no need for mortgage insurance. However, this means paying a higher rate over the life of the loan.
- Bveteran’s administration loan. If you currently own a home, and, must sell your residence, a bridge loan could be the right mortgage product. These work by combining your current and new mortgages and when your old home sells, you simply pay-off your old mortgage and refinance your new home loan.