Choosing the right mortgage loan is key to securing your finances and your future as a proud homeowner. But before you decide on a loan, it helps to first understand the different types. This way, you will be able to pick the right one for you.
- Conventional/fixed-rate mortgage loans
- Adjustable Rate Mortgage (ARM)
- Interest-only mortgage
- FHA loans
- VA loans
Taking advantage of a conventional loan means having a fixed interest rate all throughout its term. With the interest rate locked in, planning your budget is simplified and you are protected from potential increases in interest rates in the future.
Conventional loans are payable in 5, 15, or 30 years, with the longer payment periods having higher interest rates. However, these also have lower total monthly payments, making them ideal for those who plan to stay in a home for a long time.
With ARMs, their interest rates are dependent on changing economic conditions. Rates may stay fixed for a period of time but once that grace period is over, these will eventually move up or down monthly, semi-annually, or annually. ARMs may be dependent on market conditions but those taking advantage of these mortgages are still protected from market spikes with the setting of price caps.
ARMs can be helpful for those who want to pay off a loan in full within a particular time frame. If you expect your income to go up in the near future, getting an ARM might be a good option since your improving finances could be enough to cover future increases in interest rates. Since initial interest rates are lower than that of fixed-rate mortgage loans, it may be easier to qualify for a larger loan as well.
These loans reduce monthly payments by requiring only interest payments for the first five or ten years. During this period, you have the option to pay more than necessary to cover some of the principal amount. After that initial period is over, the loan acts like a conventional loan where you have to pay for both the principal and interest.
This type of loan is especially helpful for first-time homebuyers. This category of loaners can delay making larger payments until such time when they are more likely to be better off financially. The interest-only payments may also benefit homebuyers who have commission-based salaries as well.
Special assistance loans
Insured by the Federal Housing Administration, these government-backed loans are designed to assist first-time homebuyers in entering the housing market. Compared to conventional loans, FHA loans require lower minimum down payments and credit scores.
VA loans are granted by the Department of Veterans Affairs to U.S. Armed Forces veterans and, in special cases, their spouses. While requirements vary depending on the years of service and type of discharge, these loans guarantee no need for a down payment and a private mortgage insurance (PMI). They also have lower interest rates and underwriting standards than conventional loans.
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