There are four main types of homes loans that you can choose when it comes to the home buying process. Fixed-rate mortgage, adjustable-rate mortgage, VA, and FHA loans are types of home loans that you can choose, but learn a little bit more about them so you can decide on the practical type of loan for your specific home buying situation.
#1 Fixed-Rate Mortgage
The main type of loan that many home buyers choose is a fixed-rate mortgage. The reason for this popularity is that this type of loan is exactly what it says, a “fixed” rate. This means that each monthly payment that is made will be the same amount every month. For those that are on a budget and must stick to that budget, it is the best option for being able to know exactly how much of your income will need to be set aside for mortgage payments.
While current rates are low, you can take advantage of a great payment option for your mortgage and not have to worry about high interest rates taking up a good portion of your payment. This type of loan is also good for anyone who plans on buying a home for long-term or for first time home buyers who are just getting into the ins and outs of mortgages.
While there are plenty of benefits to choosing a fixed-rate mortgage there are, however, a few cons to choosing this type of home loan as well. One of the main issues for many home buyers is that fixed-rate mortgages do have the tendency to be a bit more expensive than other loans.
Also, because of a fixed-rate mortgage constantly staying the same, if there is a drop in interest rates at any time, you will not be able to take advantage of it. These cons are also combined with the fact that you cannot adjust the loan as you need. Most fixed-rate mortgages are the same across any lenders.
#2 Adjustable-Rate Mortgage
Sometimes adjustable-rate mortgages may be the better option for you to choose when it comes to your home loan. With an adjustable-rate mortgage, you can take advantage of being able to “adjust” your mortgage based on current rates. If the rate happens to go lower, then you will pay less. This means that you can take advantage of lower premiums.
Now while all of this sounds like great advantages, there are definitely disadvantages that come with it as well. Rates can of course drop, but they can just as easily increase. So if rates go up unexpectedly, you can expect to pay more more during that time. While this is does not usually happen during the first few years of an adjustable-rate mortgage, it is almost a guarantee to happen towards the halfway point of a loan. This is why this type of loan is considered a risky type of loan, especially for first time home buyers.
If you do choose an adjustable-rate mortgage, make sure you prepare yourself ahead of time. Remember to save an extra part of your income for times when the rate may go up. You can get an idea of what your average mortgage payments are after a few months. This is when you need to average out what your budget for this will be. When your mortgage payments turn out to be lower than expected, save the difference between that and your average payment amount. Then take that amount and save it for when your rate may surprisingly go up. Planning ahead is the best way to go about this type of home loan.
#3 VA Loans
VA or Veteran Affairs loans, are specifically for individuals of military, active or veteran. The qualifications are basically the same when it comes to these types of loans. Your credit history will still play a huge part in being qualified. Additionally your debt, assets, and income will be important as well. You must also contact the VA in order to receive a certificate of eligibility.
Most lenders will have a VA loan available but you should be aware that with these loans come with a funding fee which is usually calculated at about 2% of the overall amount of the home loan. .
#4FHA Loans (Federal Housing Administration)
FHA loans are particular popular among first time home buyers. This is because it helps anyone who knows they will have trouble making a down payment of 20%. It gives more individuals the chance to qualify for a home loan even if they have a low income. These loans are closer to being qualified as insurance instead of an actual mortgage.
Basically, the FHA helps to insure the loan that you want to receive from a specific lender. This helps to lower your risk factor when applying for loans, and therefore allows you to be able to qualify for a home loan. If you fall behind on the payments the FHA will take over a specified number of payments and an amount.