If you’re shopping for a home, odds are you should be shopping for a home loan as well. Where you live, how long you plan to stay there and other variables can make certain home loans better suited to your circumstances. Choosing wisely could save you a bundle on your down payment, fees and interest.
To learn more about your options, check out these common types of home loans and whom they’re suited for, so you can make the right choice.
Fixed Rate Loan :
The most common type of loan, a fixed-rate loan prescribes a single interest rate – and monthly payment – for the life of the loan, which is typically 15 or 30 years. This is right for homeowners who aren’t going anywhere soon. You pay a certain amount of money for a certain amount of years. The rise and fall of interest rates won’t change the terms of your loan, so you’ll always know what to expect. This loan is best for people who plan on staying in their home for a big chunk of the life of their loan.
Adjustable Rate Mortgage :
ARM loans offer interest rates typically lower than you’d get with a fixed-rate loan for a period of time, such as five or 10 years. But after that, your interest rates and payments will adjust, typically once a year, usually corresponding to current interest rates. This is right for home buyers with low credit scores. Since people with poor credit can’t typically get good rates on fixed-loan rates, an ARM can nudge those interest rates down enough to put homeownership within easier reach. These loans are also great for people who plan to move and sell their home before their fixed-rate period is up.
FHA Loan :
While typical loans require a down payment of 20% of the purchase price of your home, with a Federal Housing Administration loan, you can put down as little as 5.3%. This is right for home buyers that don’t have a lot of savings for a down payment. Buyers are also required to pay mortgage insurance – either upfront or over the life of the loan – which hovers around 1% of the cost of your loan.
VA Loan :
If you’ve served in the United States military, a Veterans Affair loan can be an excellent alternative to a traditional mortgage. If you qualify, you can score a great home with no money down and no mortgage insurance requirements. This is right for veterans who have served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserve. That said, the VA has strict requirements on the type of home you can purchase : It must be your primary residence and it must be “primary residence requirements” (that is, no fixer-uppers).
USDA Loan :
USDA Rural Development loans are designed for families in rural areas. The government finances 100% of the home price – in other words, no down payment necessary – and offers discounted interest rates to boot. This is right for families in rural areas who are struggling financially. These loans are designed to put homeownership in their grasp. The catch? Your debt load cannot exceed your income by more than 41% and like the FHA loan, you will be required to purchase mortgage insurance.
Bridge Loan :
Also known as a gap loan or “repeat financing,” a bridge loan is an excellent option if you’re purchasing a home before selling your 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. This is right for homeowners will excellent credit and a low debt-to-income ratio, and who don’t need to refinance more than 80% of the two homes’ combined value. Meet those requirements, an this can be a simple way of transitioning between two houses without having a meltdown – financially or emotionally – in the process.
