Deciding to buy a new home is an exciting step in your life! Shopping for a new home means shopping for a home loan and we’re happy to help walk you through some of the different mortgage options to help determine what may work best for your needs.
To help you make the right choice, we’ve outlined the common types of home loans and the kind of home owner they are best suited for.
The most common type of loan, a fixed-rate loan sets a single interest rate and monthly payment for the life of the loan, which is typically 15 or 30 years. This loan works well for homeowners who aren’t planning to move soon. You pay the same amount on your mortgage for a set number of years. The rise and fall of interest rates won’t change the terms of the loan.
ARM loans offer interest rates typically lower than a fixed-rate loan for a period of time—such as five or 10 years. But after that, the interest rates and payments will adjust, typically once a year, roughly corresponding to current interest rates. If interest rates shoot up, so do monthly payments. ARM loans are a good fit for home buyers with lower credit scores who may struggle to get good rates on a fixed-rate loan. These loans are also good for people who plan to sell before the fixed-rate period is up and their rates adjust.
Typical loans require a down payment of 20% of the purchase price of your home, but with a Federal Housing Administration loan, you can put down as little as 3.5%. FHA loans can help home buyers with little savings for a down payment, but come with stipulations. First, most loans are limited to $417,000 and don’t provide much flexibility: Rates are typically fixed, with either 15- or 30-year terms. Buyers are also required to pay mortgage insurance—either upfront or over the life of the loan—which is around 1% of the cost of your loan.
If you’ve served in the United States military, a Veterans Affairs loan can be an excellent alternative to a traditional mortgage. Those who can qualify often pay no money down and have no mortgage insurance requirements. These loans are for veterans who’ve served 90 consecutive days during wartime, 180 during peacetime, or six years in the reserves.
USDA Rural Development loans are designed for families in rural areas. The government finances 100% of the home price and offers discounted interest rates. For families in rural areas who are struggling, these loans help make homeownership a reality. The debt load cannot exceed income by more than 41%, and, like the FHA loan, homeowners will be required to purchase mortgage insurance.
Also known as a gap loan or “repeat financing,” a bridge loan is an excellent option when purchasing a home before selling a previous residence. Lenders will wrap your current and new mortgage into one payment; once your home is sold, you pay off that mortgage and refinance. These loans work for home owners with excellent credit and a low debt-to-income ratio, and who don’t need to finance more than 80% of the two homes’ combined value. Meet those requirements, and this can be a simple way of transitioning between two houses
Have more questions? Visit our lending partners for more information.
American Security Mortgage
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