Buying a home is a big deal not only because you’re now a homeowner but also because you’re probably going to need a mortgage. Mortgage loans are probably the biggest loans you’ll ever have in your life. Therefore, it’s important to choose the best mortgage for you. Here are some important tips to help decide which type of mortgage you need and want.
Types of Mortgages
As you’re probably learning, there are several types of mortgages. Mortgage loans are generally either fixed rate or adjustable rate, which is explained below, followed by the different types of mortgages.
Fixed Rate – Fixed-rate mortgages offer a fixed or consistent rate of interest and this rate continues for the term of the loan. Fixed-rate mortgages are a good choice if current interest rates are lower because you won’t have to worry about paying higher interest rates in the future, which will equate to higher monthly payments. Typical fixed rate mortgages are for 15 years or 30 years. Fixed mortgages are good for individuals who want the security of always knowing how much their mortgage payment will be.
Adjustable Rate – Adjustable rate mortgages (ARMs) start with an interest rate based on current market rates. The interest rate will adjust after a certain period and may go up or down based on the market rates. ARMs may be short-term loans or may be for 15 years or more. However, ARMs are typically used on short-term loans. There is both advantages and disadvantages to ARMs depending on the condition of the housing market. If you have reason to believe the interest rates may be going down in the future, an ARM may be a good choice. MyFICO.com also states that ARMs are a good choice if you plan to sell your home in the near future.
One of the most popular government-backed loans are FHA loans. Although originally used by first-time homebuyers, FHA loans are now used by other homeowners as well. FHA loans are very popular because the offer lower interest rates than conventional loans and typically require lower down payments. FHA loans do have specific guidelines that must be followed. FHA loans, like VA loans and USDA/RHS loans are government-backed loans aimed at helping people become homeowners by offering good rates and terms.
Conventional Bank Loans
These are the type of loans homebuyers get at banks and lending institutions. The lenders typically offer ARMs and fixed loans. They require a deposit, usually at least 20 percent. You’ll also be required to have good credit scores. Your debt-to-income ratio and ability to repay will determine what type of loan you want.