When you’re buying a home, it’s important to understand the different types of home loans that are available and how they can help you achieve your goals.
This article will cover some of the most common types of home loans and what sets them apart from one another.
Loans for people with bad credit scores
What’s important to note is that you have choices even if your options are limited. Just because your credit score isn’t up to par doesn’t mean you have to rule out the possibility of getting a home loan altogether. Many lenders specialize in loans for people with bad credit, so be sure to investigate these options as they may be an option for you.
There are some things to keep in mind when taking this route, however. Since lenders regard borrowers with bad credit scores as riskier investments, borrows will often be required to pay higher interest rates or less favorable terms and conditions compared with those who have higher credit scores.
Fixed-rate loans are self-explanatory—your interest rate will remain the same for the term of your loan. Your monthly payment will also be stable and predictable, which is great if you like planning ahead and knowing exactly what your finances look like down the road. There are several common fixed-rate loan terms: 10, 15, 20, 25, and 30 years are all popular options.
If you’re someone who needs predictability in their life (and finances), a fixed-rate loan is probably right for you. That way, with a fixed-rate loan product, you can lock in the current low rate before it rises later. Sounds great so far! What about the cons? As with everything else in life, there are always a couple drawbacks to these kinds of loans, too:
- You’ll pay more money overall because interest costs remain consistent throughout the length of your loan term.
- You might end up paying higher closing costs because lenders typically charge less for variable-rate mortgages than for fixed ones.
An FHA loan is a type of mortgage where the borrower must put down less money up front than with a conventional loan. Borrowers are required to pay mortgage insurance, which protects the lender if a borrower defaults on the loan.
For all FHA loans, borrowers pay an upfront mortgage insurance premium (MIP) of 1.75 percent. Borrowers also pay a modest ongoing fee with each monthly payment, which depends on the risk the FHA takes with your loan.
VA loans are available to eligible active military members, veterans, and surviving spouses. Unlike an FHA loan, a VA loan is guaranteed by the Department of Veterans Affairs (VA) and is not secured by the Federal Housing Administration (FHA). In order for you to get a VA loan, you will need to meet certain eligibility requirements.
There are three types of VA loans: VA purchase loans, interest rate reduction refinancing loans (IRRRL), and cash-out refinancing loans. For each type of VA purchase loan, the borrower may have up to four total loans. The maximum amount that can be borrowed on any one loan is $417,000; however, higher limits may apply in certain high-cost areas. Currently the average for conventional fixed-rate mortgage rates is about 4%, according to Bankrate’s weekly survey of large lenders; The average 30-year fixed jumbo mortgage rate is 3.99%.
The pros of this type of home loan include:
- Possible 100% financing; no down payment required.
- No private mortgage insurance required if you put 20% or more down. If less than 20% down payment is made, then you will be required to pay a monthly fee towards private mortgage insurance until 20% has been paid off in equity through making payments or appreciation in market value.
- No prepayment penalty.
- Adjustable-rate mortgages
- An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can change over time. These loans are typically referred to as 5/1 or 7/1 loans and have lower interest rates than fixed-rate loans, but you must pay a large down payment. The number after the “5” or “7” refers to how many years your mortgage will stay at one interest rate. For example, with a 5/1 ARM, your interest rate will stay the same for five years before it can adjust during the next year.
A jumbo loan is a mortgage that has a maximum loan amount above the conforming loan limits set by the Federal Housing Finance Agency (FHFA). In 2018, the jumbo mortgage limit for single family homes is any mortgage above $453,100 in most counties, but it can reach as high as $679,650 in others.
Jumbo rates are higher than conforming rates because they carry greater risk—they aren’t backed by Fannie Mae or Freddie Mac. Since the dollar amount of a jumbo loan is higher than a conventional loan, lenders require more stringent qualification standards.
Cash-out refinance loans
Cash-out refinance loans are a type of loan through which a homeowner can refinance their current mortgage and take cash out of the equity in their home. With this type of loan, you’ll pay off your existing mortgage, and then create a new mortgage for more than the amount you currently owe—the difference will be given to you in cash. Bear in mind that cash-out refinance loans are only available to homeowners who have equity in their home. You won’t be able to get this type of loan if you’re underwater on your current mortgage, meaning that the value of your home is less than what you owe on it. To qualify for this type of loan, which generally has lower interest rates than most other types of debt consolidation loans, lenders will want you to have at least 20% equity in your home.
Home equity lines of credit
A home equity line of credit (HELOC) is a loan where the lender agrees to lend you a certain amount of money, up to a set limit. You can borrow some or all of this limit, and the funds are available for use whenever you need them. This makes it pretty similar to a credit card.
This type of loan is popular if you don’t have an immediate need for all the money available in your home equity right now. The lender approves your loan upfront, and so long as you stay within your agreed-upon limit, you can take out only what you need now. HELOCs can be particularly appealing if your needs change over time — say, if you start out using your HELOC as emergency cash but then want to fund home renovations later.
Which loan is right for you? We’d welcome the opportunity to talk to you about your loan options. We can help you choose a mortgage plan that suits your budget and current financial standing. Speak to our team today!
PRMI – Wooster has been helping clients purchase homes since 1998 and is backed by one of the most established mortgage lenders in the county with a nationwide presence. We offer a variety of loan programs for the greater Wooster, Ohio area – including Canton and Medina, Ohio. Are you looking for a trusted lender? Contact us by phone at 866.888.7902 or email Matt Shanlian at firstname.lastname@example.org.
*Opinions expressed are solely my own and do not express the views of my employer.