In most cases, planning to buy a new home also means taking out a home loan. If this your first time buying a house, you may be overwhelmed by how many different types of mortgages there are. The best mortgage for you will depend on a few various factors like your location, how long you plan to stay, and more. Plus, making the right choice can help you save money on your down payment, interest, and other costs. Use the guide below to learn more about your mortgage options so you can select the right one.
Adjustable Rate Mortgage
With an adjustable rate mortgage (ARM), you start out with a low interest rate for a set amount of time, usually five or ten years. After that period, your interest rates and payments will change based on the current interest rates. The rate will adjust about once a year. So, if the interest rates increase, so will your monthly payments and if they drop, your payments will too. An ARM is better for home buyers with lower credit scores because these candidates cannot usually get reasonable rates on fixed interest loans. This sort of mortgage is also right for people who plan to move and sell their home before their rates begin changing.
Fixed Rate Loan
This is the most common type of mortgage. It offers a single interest rate for the length of the loan, which is usually 15 or 30 years. Because the interest rate won’t change as it would with an ARM, these loans are perfect for most homeowners. They are especially great for those who intend to stay in their homes for the full length of the loan.
An FHA loan is a government-backed mortgage option that allows home buyers to make a lower down payment. Typical loans require buyers to make a down payment of 20 percent of the purchase price. With an FHA (Federal Housing Administration) mortgage, you can pay as little as 3.5 percent. If you do not have a lot saved up and still want to buy a house, an FHA loan may be the way to go. There are, however, a few stipulations that come with this sort of loan. The majority of loans are restricted to $417,000, interest rates are fixed, and the long-term is either 15 or 30 years. You will also need to pay for mortgage insurance which will cost about one percent of the loan total.
USDA Loans and VA Loans
These are two other government-backed mortgage options. USDA loans are for families in rural areas who are financially struggling. You won’t need to make a down payment and the government offers discounted interest rates. To get one of these loans, your debt cannot exceed your income by more than 41 percent. VA loans are only available to those who have served in the United States military. There are restrictions on the type of home you can buy with this loan, so be sure to review these before making your choice.