Thinking about taking out a home loan? Not all home loans are the same. Read here to understand the different types of home loans.
Are you ready to become a homeowner? Before you start drooling over properties, you first need to learn about the different types of home loans.
Mortgages aren’t just one thing: home loans come in different “shapes and sizes”. There are eight types of mortgages out there, but if you’re a first-time buyer, only four will typically apply.
Here’s what you need to know about the most common home loans.
1. Conventional Mortgages
The conventional mortgage is the home loan you hear most about. Your bank lends money to its customers to buy properties. These loans feature a fixed interest rate, which means your interest rate remains the same on the day you pay off your mortgage as it was the day you received it.
You can also choose a term between 10 and 40 years. However, most loans are either a 15 or 30-year term.
If you’re a first-time buyer, you’ll have a harder time getting a conventional mortgage. Although they take less paperwork, banks demand higher deposits, credit scores, and incomes. So, if you’re struggling to find approval, jump down to #4 and read about government loans.
2. Interest-Only Mortgages
An interest-only mortgage is unique because it allows you to pay down interest rather than working on the principal amount borrowed. Choosing an interest-only mortgage may win you lower payments for the first five to ten years of the loan, but you may make higher payments later. What’s more, you will slow down the repayment time.
Interest-only mortgages make sense if you want to buy a more expensive home now, and you’re waiting on a big job promotion or inheritance that will make it more affordable. You may also benefit if you know you will sell the home quickly.
3. Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) is a home loan with a changing interest rate. Typically, the interest rate is very low at the beginning, but the bank tracks the national interest rate and adjusts your loan periodically.
You might choose an ARM if you want to pay off the loan before your low-interest rate expires or if the higher interest rate doesn’t impact your finances.
4. Government Loans
The U.S. government is keen to see more Americans buy and own their own homes. As a result, there’s a long list of government programs available to back your mortgage and make it easier to buy.
FHA loans are the most common type. They allow you to buy with a lower credit score and a smaller deposit because the federal government backs your mortgage with the lender. However, there are both income restrictions and limits to the cost of the property.
If you’re a veteran, you can also get a loan from the VA. And if you want to live somewhere rural or in a designated area, the Department of Agriculture may even give you a mortgage.
Learn More About the Types of Home Loans Available
There’s more to meets the eye when you’re looking for a mortgage. The good news is that there are enough types of home loans to cater to almost every kind of buyer. Your best bet is to do plenty of research and get solid financial advice before you buy. Doing so will help you buy and stay in your home without a problem.
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