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Home buying is not for the faint of heart. Running the numbers to find affordability, saving for a deposit, and saving for moving-day maintenance expenses is only part of the challenge.
Are you wondering about the different types of home loans available?
A home loan can help you qualify for the mortgage that meets your needs. Keep reading to learn more about the different types of home loans available today.
Fixed-Rate Mortgages
The interest rate on a fixed-rate mortgage (FRM) remains unchanged over the entire loan period of 15 to 30 years. This is ideal for homebuyers who want consistent monthly payments.
The interest rate of an FRM is generally slightly higher than other loan types. FRMs are also available with various other loan features, such as points, closing costs, and prepayment options.
Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) offer an initial fixed period with a variable rate that changes after that period expires. After the initial fixed-rate period is over, the interest rates may be adjusted in periodic intervals based on the agreement.
If the current interest rate environment is low, the generous initial rate can help borrowers save money overall. Since the interest rate can go up, borrowers should also consider the risk of payments increasing over time.
Conventional Types of Home Loans
Conventional home loans are traditionally offered by banks and other financial institutions. These loans typically require a down payment of 20 percent and require private mortgage insurance (PMI). Here are two types:
Conforming Loans
A conforming loan follows the guidelines of the Federal National Mortgage Association or FNMA.
These loans usually carry lower interest rates, require less documentation, and pose fewer restrictions. Conforming loans require a down payment of two to twenty percent, depending on your credit score.
Other benefits include lower closing costs and reduced down payment requirements for prime borrowers.
Non-Conforming Loans
Non-conforming loans have more stringent requirements. Some requirements include larger down payments and a higher credit score.
These also come at a higher interest rate, often as much as 1-2 % more than a conforming loan. It also has a maximum debt-to-income ratio, often set at 50%.
However, it could be the only option for someone who might not obtain the financing they need for a traditional loan.
Government-Insured Loans
Government-insured loans are administered by the Federal Housing Administration (FHA), the Veterans Administration (VA), and the US Department of Agriculture (USDA).
With an FHA loan, you may be able to put as little as 3.5% of the home’s purchase price as a down payment. Traditional mortgages typically require 20%.
If you have served in the Armed Forces or the National Guard, you must have read about VA loans. VA loans and USDA loans offer financing benefits with no down payment required. USDA loans offer 100% financing on eligible properties.
Jumbo Loans
Jumbo loans are mortgages that are significantly higher than traditional conforming loans. They are often used to finance a large, luxury home or high-end real estate.
Jumbo loans are available with loan amounts over $484,350 but can range up to $3 million. Interest rates tend to be higher, and the terms are less favorable.
The borrower usually needs good to excellent credit, the ability to make a sizable down payment, and a large number of liquid assets.
Research More on Different Types of Home Loans
Understanding the different types of home loans available is essential to finding the right mortgage that fits your needs. Do your research and speak to your broker to start the process today.
You’ll get one step closer to things like lower interest rates and a more comfortable lifestyle.
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