The different types of home loans: PART 1
You get a home loan, you get a home loan and you get a home loan! Everyone gets a home loan! On your search for your forever-home, you will come across several different kinds of home loans. The hardest part is figuring out which one works best for you and your partner.
Exactly how many different loans are there? There are 11 and each one of these generalized loans has two to three different ones under their subsections. That’s a lot of loans! Let us help you navigate this.
You might wonder- why are there so many different loans? There are several mortgage rates because everyone’s finances, credit and banks all do it different. All of the different banks, people borrowing and homes on the market make it a tricky world to navigate. Your neighbor might have the same exact home as you, but more than likely, their mortgage is 100 percent different than yours.
Fixed-rate vs. adjustable-rate mortgage (ARM)
The main difference between a fixed-rate versus an adjustable-rate mortgage is the ability to change the interest rate. A fixed-rate is a loan with a set interest rate that can’t be changed but an ARM has the ability to fluctuate and change with time. With ARM you start off at a lower interest rate up to a few years, and once the introduction period is over the payment will likely go up and the interest rate can increase as well. There are three different loans available:
- 30-year fixed-rate: This is the most common of all loans, and is underneath the fixed-rate. Once you get your mortgage, you’ll get your interest rate and that’s the set amount. There is no negotiation at all. Why is this? This is because a 30-year fixed-rate is a fully amortizing loan. This means the principal and interests are bundled together. With this loan, you have 30 years to pay it off.
- 15-year fixed rate: This loan is the same as the 30-year fixed-rate but just in a shorter time frame. The biggest advantage of this loan is the ability to pay off your mortgage in a shorter time frame; however, the payment will be higher than a 30 year loan. If you can afford this then this might be the best option available for you!
- 5/1 ARM: This loan is an adjustable-rate mortgage and the interest rate is initially set in stone but after five years it can be changed. The first five years of interest rates are lower payments that adjust on the economy.
Government home loans
A government-backed loan can be used for everyone! This loan is offered to people with a low-income and who do not have the best credit to apply for a loan to purchase a home and vice versa. The best part of this loan is that depending on the loan there is no money needed down or very little.
- FHA loans: A FHA loan is insured by the Federal Housing Administration. These are typically the most common for new, first-time home buyers because the downpayment is only 3.5 percent. Furthermore, the requirement for the credit score is also lower between 500 to 579 as long as a 10 percent down payment is made. The requirements for putting 3.5 percent down includes a FICO score of 580 minimum to apply.
- FHA 203K Rehab Loans: A subsection of a FHA loan allows for people to purchase their first home and provides renovation costs. A great example is a couple buying their first home that needs some major or minor work. This allows for the couple to cover the cost of home improvement under the same loan as their mortgage.
- USDA: This might seem surprising that the U.S. Department of Agriculture provides home loans, but this is all under their Rural Development program, launched in 2017. These loans are particularly for families who live in rural areas. This loan offers a low interest rate with nothing down. There are different kinds of USDA loans, and these loans are similar to FHA and VA options. The interests rates on these loans can be as small as one percent for these families living in rural America!
- VA loans: These loans are specifically made for veterans of the U.S. This loan is similar to the FHA and USDA loan in the sense the interest is low and no down payment is needed. There are several different loans available from IRRRL to Adapted Housing Grants. This is a salute to the ones who sacrificed for our freedom.
This is just the first set of loans offered when one is looking to purchase a home! Don’t worry, come talk to our team. We can help you navigate all of this and find someone to help you at the bank. We all can work together! Contact us today for more information.