Last Updated on September 17, 2020 by Andrew Lee
Most homebuyers have to rely on a mortgage to help them pay for a house. Nowadays, lenders offer a vaster array of loan options, allowing consumers to find one that best suits their needs and financial status.
A fixed-rate mortgage, also known as “plain vanilla” mortgage, comes with a locked-in or set interest rate. A borrower with this type of home loan will make the same monthly insurance payments for the entire life of the mortgage.
These mortgages provide people the chance to spread out their house purchase expenditures over a considerable length of time, with them also knowing exactly how much they need to pay every month. Loan term varies, but the most popular ones are the 15-year and the 30-year terms. In many cases, borrowers can put down additional payments to reduce the length of time they need to repay their debts. However, it’s important to check with the lender first regarding pre-payment penalties.
These loans are suited for consumers with a steady source of established income, and who also have plans of staying in their house for a long period of time.
Adjustable- or Variable-Rate Mortgages
Adjustable-rate mortgages also referred to as variable-rate mortgages, come with an unfixed interest rate that follows changes in the market factors. Initially, they may have a lower interest rate than a fixed-rate mortgage, although this will rise after the “teaser” period. The lower initial rate makes it easier for borrowers to qualify for a bigger loan amount.
The main drawback to an ARM is the payment shock that may take place in the event the interest rate goes up. They can occur suddenly, and in some cases, the change in the rate can take the form of a sizeable increase. Unprepared borrowers may find themselves in a serious financial pinch because of this.
Experts recommend home buyers to go for this type of home loan if the future holds a great possibility of declining rates. Those who also intend to live in the house only for a short period of time or pay off the entire loan before the teaser rate ends may find this a better option than a fixed-rate loan.
Thanks to the less rigorous requirements and standards of the Federal Housing Authority (FHA)-insured loans, a lot of first-time homebuyers can qualify for one. Credit expectations are reasonable and easier to satisfy and they only require a minimal down payment, at around 3.5%. The greater flexibility of the income requirements also makes FHA loans attractive to borrowers.
The primary requirements a borrower has to meet to qualify for this housing loan include:
- Borrowing for the purchase of a primary residence
- The borrower has to occupy the house
Consumers can’t use FHA loans for rental or investment properties.
Veterans Affairs (VA) Loans
Borrowers who’ve served in the United States military can qualify for a VA loan. It can serve as a great substitute for a traditional mortgage. Those who qualify can purchase a home without having to make a down payment. They also don’t have to worry about purchasing mortgage insurance.
The United States Department of Agriculture offers its own kind of housing loans, known as the USDA Rural Development loans. Families living in rural areas can apply for one and when they qualify, they can expect the government to finance the entire purchase price of the house. In short, borrowers don’t have to make a down payment. They can even secure lower interest rates.
Because mortgages are a long-term contract, homebuyers should take as much time as possible to prepare their finances. And whether a down payment is required or not, it pays to save up for one, in order to avoid the additional cost of mortgage insurance.