How to Cancel Private Mortgage Insurance (PMI) on Conventional Loans To cancel Private Mortgage Insurance (PMI)…
Buying a home for the first time can sure be confusing. Between dealing with realtors, bidding wars with other buyers and even whittling down your must-haves and your negotiables—there’s so much to keep track of. And that’s before you get into the nitty-gritty of financing. Chances are the very suggestion of loans and down payments send a sharp shiver down your spine. Well, not to fear. If you’re a first-time home buyer—we’re here to help. Let’s take a look at five types of home loans to finance your dream house.
Why Are There So Many Types of Home Loans?
First things first, when it comes to financing your home, there’s no one-size-fits-all solution. Some types of home loans are best suited for veterans in good standing, or low-income folks, while others work better for someone looking to pay off their loan consistently over an extended period of time.
Some types of home loans are best suited for veterans in good standing, or low-income folks, while others work better for someone looking to pay off their loan consistently over an extended period.
Your lender can help you figure out which type of loan is best, as well as the kind of rate, but it’s ready to go in informed.
Fixed Rate Mortgage
A fixed rate mortgage is the most common type of home loan. Fixed rate mortgages are paid off at a pre-determined amount of time, say over the course of 20 or 30 years, and are locked in with a particular interest rate.
Generally speaking, many new homeowners seek out fixed-rate mortgages because it offers a sense of security. With fixed-rate mortgages, changing interest rates generally won’t be a concern and your monthly payments should be relatively stable.
You may see some fluctuations in your monthly payments, based on property taxes, insurance or other factors, but it’s pretty close to what you’ve agreed to in the first place.
It’s worth pointing out that commitment-phobes among us or those who plan on moving after just a few years likely won’t be happy with a fixed rate loan. In that case, you’re likely better off with an adjustable rate mortgage.
Adjustable Rate Mortgage
An adjustable-rate mortgage (or ARM), is a conventional home loan in which this interest rate fluctuates over the life of the loan. In general, the rate on the loan changes every six months or year after an initial period with a fixed rate.
Usually, an ARM is represented by two numbers. For example, a 5/1 ARM comes with a fixed rate, which stays in place for five years, then after that time has elapsed, will be on a schedule, in which the interest rate readjusts each year.
Or, the loan can be expressed this way. A 5/25 ARM offers a fixed rate for three years, then is subject to floating interest rates for the next 25 years.
While the ARM approach offers less security than its fixed counterpart, it has the advantage of starting off with a lower rate. The initial low rate may make this option more attractive to buyers who want to resell their home after a few years, rather than opting to stay put for 15, 20, 30 years.
The downside to getting an ARM is, the adjustments are never a sure thing. Granted, there are limits on the rates, but even minor ups and downs may need to be considered in your monthly budget.
A type of government-sponsored loan managed by the US Department of Housing and Urban Development, FHA (or, Federal Housing Administration Loans) typically require a lower down payment than a conventional loan (ARM or fixed rate) and is subject to laxer credit requirements—in many cases, as low as 500.
FHA loans are not available to anyone who meets the credit requirements. These loans are exclusively for individuals below a certain income bracket, and part of a government initiative to help more people buy homes.
FHA loans, as compared to other types of home loans, may be a good option for first-time buyers. It is important that those buyers have a successful employment history and can demonstrate that they’ve consistently paid their rent, utilities, and other bills on time.
The Department of Veterans Affairs has a lending program in place making it easier for military and their families to buy a home. This program looks a lot like the FHA program but extends exclusively to veterans or current service members.
VA loans offer an advantage to those who are eligible. The government guarantees the loans, which means, if the borrower defaults on loan payments, the federal government is on the hook for the amount owed.
Additionally, borrowers can receive full financing when they choose to buy a home. Basically, this type of home loan allows borrowers to skip the down payment altogether.
Loan limits vary by county, but in the United States, conventional types of home loans have a cap. Jumbo loans may exceed this limit, but applicants need to meet a particular set of criteria to qualify.
Qualifications include a high debt to income ratio (monthly bills should not exceed 43% of your income), your credit score is at least 700 (preferably higher), and finally, you are able to put 20% or more down up front.
Long story short, a jumbo loan allows you to buy a more expensive home. Which, while a large burden to take on, may help you secure a home in a high buying area.
Are You Ready to Take the Leap?
Getting ready to buy your first home? Metropolitan Mortgage Corporation can help! Get started by requesting a personalized mortgage quote and we’ll walk you through the rest.
Once you’ve been pre-approved, download our app — it’s got it all from helping you figure out home affordability to finding the right loan program and keeping track of all the documentation you’ll collect throughout the process.