6 Different Types of Home Loans: Which One Is Right for You?

home loans

6 Different Types of Home Loans: Which One Is Right for You?

By Jamie Wiebe

f you’re a first-time home buyer shopping for a home, odds are you should be shopping for mortgage loans as well—and these days, it’s by no means a one-mortgage-fits-all model. You’ll want to get and understanding of all the basics, with mortgage 101.

Where you live, how long you plan to stay put, and other variables can make certain mortgage loans better suited to a home buyer’s circumstances and loan amount. Choosing wisely between them could save you a bundle on your down payment, fees, and interest.

Many types of house loans exist: conventional loans, FHA loans, VA loans, fixed-rate loans, adjustable-rate mortgages, jumbo loans, and more. Each mortgage loan may require certain down payments or specify standards for loan amount, mortgage insurance, and interest.

Types of mortgage loans: What to know about types of house loans

To learn about all your home-buying options, check out these common types of mortgage loans and whom they’re suited for, so you can make the right choice. The type of mortgage loan that you choose could affect your monthly payment.

Fixed-rate loan

The most common type of conventional loan, a fixed-rate loan prescribes a single interest rate—and monthly payment—for the life of the loan, which is typically 15 or 30 years. The interest rate remains what it is, or stays fixed, for the life of the loan. Compare fixed-rate vs. adjustable-rate mortgages to see what’s right for you.

Right for: Homeowners who crave predictability and aren’t going anywhere soon may be best suited for this conventional loan. For your mortgage payment, you pay X amount for Y years—and that’s the end for a conventional loan. A fixed-rate loan will require a down payment. The rise and fall of interest rates won’t change the terms of your home loan, so you’ll always know what to expect with your monthly payment. That said, a fixed-rate mortgage is best for people who plan to stay in their home for at least a good chunk of the life of the loan; if you think you’ll move fairly soon, you may want to consider the next option.

Adjustable-rate mortgage

Unlike fixed-rate mortgages, adjustable-rate mortgages (ARM) offer mortgage interest rates typically lower than you’d get with a fixed-rate mortgage for a period of time—such as five or 10 years, rather than the life of a loan. But after that, your interest rates (and monthly payments) will adjust, typically once a year, roughly corresponding to current interest rates. So if interest rates shoot up, so do your monthly payments; if they plummet, you’ll pay less on mortgage payments.

Right for: Home buyers with lower credit scores are best suited for an adjustable-rate mortgage. Since people with poor credit typically can’t get good rates on fixed-rate loans, an adjustable-rate mortgage can nudge those interest rates down enough to put homeownership within easier reach. These home loans are also great for people who plan to move and sell their home before their fixed-rate period is up and their rates start vacillating. However, the monthly payment can fluctuate.

FHA loan

While typical home loans require a down payment of 20% of the purchase price of your home, with a Federal Housing Administration, or FHA loan, you can put down as little as 3.5%. That’s because Federal Housing Administration loans are government-backed.

Right for: Home buyers with meager savings for a down payment are a good fit for an FHA loan. The FHA has several requirements for mortgage loans. First, most loan amounts are limited to $417,000 and don’t provide much flexibility. FHA loans are fixed-rate mortgages, with either 15- or 30-year terms. Buyers of FHA-approved loans are also required to pay mortgage insurance—either upfront or over the life of the loan—which hovers at around 1% of the cost of your loan amount.

VA loan

If you’ve served in the United States military, a Veterans Affairs or VA loan can be an excellent alternative to a conventional loan. If you qualify for a VA loan, you can score a sweet home with no down payment and no mortgage insurance requirements.

Right for: VA loans are for veterans who’ve served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves. Because the home loans are government-backed, the VA has strict requirements on the type of home buyers can purchase with a VA loan: It must be your primary residence, and it must meet “minimum property requirements” (that is, no fixer-uppers allowed).

USDA loan

Another government-sponsored home loan is the USDA Rural Development loan, which is designed for families in rural areas. The government finances 100% of the home price for USDA-eligible homes—in other words, no down payment necessary—and offers discounted mortgage interest rates to boot.

Right for: Borrowers in rural areas who are struggling financially can access USDA-eligible home loans. These home loans are designed to put homeownership within their grasp, with affordable mortgage payments. The catch? Your debt load cannot exceed your income by more than 41%, and, as with the FHA, you will be required to purchase mortgage insurance.

Bridge loan

Also known as a gap loan or “repeat financing,” a bridge loan is an excellent option if you’re purchasing a home before selling your previous residence. Lenders will wrap your current and new mortgage payments into one; once your home is sold, you pay off that mortgage and refinance.

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Which Type of Mortgage Is Right for You? A Guide for Home Buyers

home mortgage

By: Daniel Bortz

Need a mortgage to buy a home? Oh course you do! So you’ll want to consider carefully which type of mortgage is right for you. That’s right, you have options! And it’s important to choose a home loan that best suits your financial circumstances, because it can save you major money and make sure those payments will likely remain within your financial reach.

In this fourth installment of our Stress-Free Guide to Getting a Mortgage, we’ll walk you through the choices, and the pros and cons of each.

Fixed-rate mortgage

True to its name, a fixed-rate mortgage means that the interest rate you pay remains fixed at the same level throughout the life of your loan (typically 15 or 30 years).

The majority of home buyers prefer fixed-rate mortgages because they offer long-term stability, says Katie Miller, vice president of mortgage lending at Navy Federal Credit Union. And indeed, they are ideal if you plan to stay in your home for at least five years—and the longer you stay, the more sense a fixed-rate mortgage makes.

But keep in mind, this peace of mind comes with a price. Fixed-rate loans typically have higher interest rates than the initial rates offered on adjustable-rate loans. More on those next…

Adjustable-rate mortgage

An adjustable-rate mortgage, or ARM, is a home loan that offers a low interest rate for an introductory period. After that period—typically two to five years—the rate becomes adjustable up to a certain limit, depending on market conditions. If certain economic indexes change, your rate could jump after the intro period ends. If indexes drop, your payments might stay the same or even go down. Hence, opting for an ARM can be a bit of a gamble. If you think you might outstay the introductory period, take a good look at the maximum interest rate—it’s often considerably higher than that of a fixed-rate mortgage.

Nonetheless, if you plan to sell the home within a short period of time, an ARM may be preferable. As long as you’re ready to move on before the introductory period ends, you’ll benefit from the advantage of making lower payments while you’re living in the home. Tick tock! And because your lender will be qualifying you on the basis of a lower monthly payment, you could afford a more expensive home than you would with a fixed-rate mortgage.

FHA loan

If your finances aren’t in great shape, a Federal Housing Administration loan could be an excellent option. FHA loans were created for low- and moderate-income households that would otherwise be locked out of the housing market due to subpar credit—with qualifying credit scores starting at 580. FHA loans also enable you to qualify for a mortgage with a down payment as low as 3.5%. These mortgages are government-insured, which guarantees that the lender won’t lose its money if the borrower defaults.

Here’s the downside: Because the federal government insures these loans, borrowers must pay an upfront mortgage insurance premium. Currently the fee is 1.75%—that’s $5,250 on a $300,000 home loan. Borrowers will also have to pay annual mortgage insurance, currently around 0.85% of the borrowed loan amount—or $2,550 more per year. FHA loans are usually capped at $417,000. (In certain high-cost areas, the limit is $625,000.) This means you have limited buying power when using an FHA loan, although if you aren’t looking to saddle yourself with a huge home loan, this won’t be an issue.

VA loan

The U.S. Department of Veterans Affairs loan program, which began with the creation of the GI Bill of 1944, gives active or retired military personnel the opportunity to purchase a home with a $0 down payment and no mortgage insurance premium. VA loans also offer attractive interest rates.

However, “requirements are fairly stringent,” says Miller. VA lenders are typically looking for a credit score of 620, and every VA purchase loan requires a special appraisal that includes the valuation of the property and a close check of the home’s condition.

USDA loan

Another type of government-backed mortgage, these loans are offered by the U.S. Department of Agriculture Rural Development in towns with populations of 10,000 or less (you can check the USDA website to see whether your location is eligible). Geared toward low-income buyers, USDA loans can have down payments as low as 0%. The cons? They do charge an upfront mortgage insurance fee of 2% of the loan amount, and also carry a monthly mortgage insurance premium of 0.5%.

Jumbo loan

If you live in a pricey housing market, you may end up with a jumbo loan—a mortgage that’s above the limits for government-sponsored loans. In most parts of the country, that means loans over $417,000; in areas where the cost of living is extremely high (e.g., Manhattan and San Francisco), the threshold jumps to $625,000. (You can check the limit in your local market.)

But keep in mind: Since the amount of money being borrowed is so high, jumbo loans typically require home buyers to make a bigger down payment—up to 30% for some lenders—and have at least a 680 credit score.

So now that you know the types of mortgages you can get, it’s time to start shopping for one!

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8 Critical Things to Do Before Buying a Home: How Many Have You Done?

house calculations

By: Margaret Heidenry

Your Checklist for Buying a Home

So you’re finally ready to get serious and buy a house—chalk it up to the amazing spring weather, or maybe a precious bun baking in the oven, or that much anticipated promotion at work. Whatever the reason, you feel primed to start poring over listings and spending your weekends open-house hopping. Exciting!

Yet while you might feel prepared for this next giant step, just remember—there’s a lot of planning and prep work that goes into this purchase, even before you start to look at homes. So make sure you’ve got all your mallards in a row first! Use this checklist to figure out if there are any things you may have missed.

1. Crunch your numbers

First, ask yourself not if you’re ready emotionally—because it sounds like you are—but ready financially, says Kristen Robinson, senior vice president at Fidelity Investments. A perfect place to start is at our Home Affordability Calculator, where you can punch in your income, desired location, and other factors to see if your expectations jibe with reality. Good luck!

2. Know your credit score

Your mortgage’s interest rate—and, as a result, the size of your monthly payments—will be directly related to your credit or FICO score, essentially a summary of how reliably you’ve been paying off your debts.

“If you’ve had too many problems or late payments leading up to the purchase of a home, your score could be lower, and you might get a higher mortgage rate,” says Ali Vafai, president of The Money Source, a national lender and servicer. Many major lenders require a score of at least 620 for a mortgage, but if you find out you’re below that or want to boost your score, now is the time to get started, since it can take months to take effect.

3. Amass a down payment

Most mortgage lenders require a cash down payment of 5% to 20% of the price of a home. For the U.S. median home price of $292,700, that’s anywhere from $14,635 to $58,540. If you don’t have this kind of cash lying around, it’s high time to start a saving goal for the next few months. You can start by putting off buying any big-ticket items, fancy vacations or other extravagances. This is a new home we’re talking about, remember? You can also explore other ways to come up with a down payment fast—like borrowing from your IRA or even getting a gift from your parents (lucky you).

4. Get educated

Your Checklist for Buying a Home

The most important aspect of purchasing a home? Understanding the nuts and bolts of how it works. Consider taking advantage of local home-buying seminars, often offered by banks or nonprofits. Such resources will explain aspects of a home loan, like the criteria lenders use to evaluate a borrower, the documentation buyers will need to provide and what each portion of a mortgage payment goes toward. Even better: these seminars are usually free.

5. Interview at least three real estate agents

Just about everyone knows a real estate agent or five, which explains why 52% of home buyers find their agent through a friend. But don’t just settle for the first agent to cross your path—remember, a house is a huge purchase, the stakes are high. In the same way you’d want to thoroughly vet a surgeon before upcoming surgery, make sure to do the same here, too. Here are some questions to ask a real estate agent before deciding which one is right for you.

A real estate agent can also help in the education department, according to Christine Lutz, director of residential brokerage for Chicago-based Kinzie Real Estate Group. “An agent will often have relationships with lenders that buyers can work with to determine a budget and down payment percentage and get pre-approved for a mortgage.”

6. Go mortgage shopping

In the same way you wouldn’t buy the first house you set foot in, you shouldn’t commit to the very first mortgage you meet, either.

“Mortgages are not one-size-fits-all,” says Scott Haymore, head of mortgage pricing and secondary markets at TD Bank. He advises buyers to find a lender they trust and to discuss their financial situation. A lender will then help buyers “understand what financing options are available.”

7. Ballpark your closing costs

Buyers sometimes forget, amid their scramble to make a down payment and monthly mortgage fees, that that’s not everything they need to pay for. Another sizable chunk are closing costs, and they’re no small chunk of change, ranging from 3% to 6% of the purchase price thanks to taxes, transfer fees, and other expenses. So, make sure to budget for this expense too, just so you aren’t blindsided come closing time.

8. Ponder the future

Home buyers sometimes think of the purchase “inside a vacuum,” says Jeremy Hallett, CEO of Quotacy.com. That’s why he advises “making sure you have a will in place. Buyers should also consider a term life policy that runs at least 20 years and would pay off the home if something tragic happened—$20 a month buys a $500,000 policy.”

Robinson adds that before buying a home, you should have “an emergency fund established with enough money to cover three to six months of living in case you’re faced with an unexpected financial hardship. Considering your retirement savings is also important; you should continue making contributions towards your future.”

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Should You Refinance Even If You Plan to Sell Your Home?

refinance if selling

By: Credit.com

Are you interested in refinancing your mortgage, but hesitant to do so because you’re thinking of selling your home at some point? Believe it or not, refinancing could still make sense. Here are several reasons why you might want to consider refinancing anyway.

Your financial circumstances could change

Let’s say you plan to sell your house in five to seven years. No matter how well you plan for the future financially, things happen. Job loss, illness, death—life inevitably gets in the way of your financial plans. Focus on the here and now, as long as you can financially justify refinancing your mortgage. The longer the horizon of selling the home, the more chances life has of getting in the way. If refinancing can save you money in the meantime, it may just make sense.

Because financial circumstances can change over time, for better or worse, it can be a good idea to calculate how affordable your house really is for you. This free calculator can tell you how much house you can afford.

You could take advantage of lower interest rates

At publishing time, 30-year mortgage rates have edged their way up and are hovering just over 4%. The new outlook for mortgage rates points to continual increases, bringing the cost of debt up. Picture this, if you don’t sell the property or if there is a market correction—and you do not refinance for whatever reason—is your current loan rate and payment something that you can afford to carry for the long haul? If you could save money or better your financial position, it is probably worth investigating. Rates are even better on jumbo mortgage loans, as more investors are pouring into this particular market niche. So if you have a big mortgage on your home, you may want to consider refinancing.

You’re facing a higher rate on your ARM or HELOC

With the increased likelihood of interest rates going up in fall 2015, the subsequent recasting of adjustable-rate mortgages and home equity lines of credit will affect millions of homeowners. Most adjustable mortgage loans were tied to the London Interbank Offered Rate, which closely trails the Fed Funds Rate, the rate at which the Federal Reserve uses to control the U.S. economy. If the Federal Reserve hikes interest rates, LIBOR will soon follow suit, and any homeowners within their adjustment period will experience a higher payment or a future higher payment when their adjustable-rate loans reset.

A HELOC works in a similar fashion to an ARM with a fixed period for the interest rate, followed by a rate reset. For a HELOC, payments are interest-only for the first 10 years of the 30-year term. After 10 years, the loan resets, and for the remaining 20 years the loan payment is principal and interest, so at the end of 30 years, the loan is paid off in full. The payment shock will happen after the first 10 years.

If you have a first mortgage on your home with a HELOC, it very well might make sense even if you plan to sell the home down the road, to roll the first mortgage and HELOC into one, saving money and continuing to make a manageable mortgage payment until you sell.

Mortgage tip: If you have not taken any draws on the HELOC in the past 12 months, you may be eligible for more mortgage programs as the HELOC may be considered a “rate and term,” which allows you to refinance up to 80% of the value of the home.

You want to rid yourself of this dreaded mortgage cost

The one mortgage cost consumers love to hate is private mortgage insurance. PMI is an extra portion of the mortgage payment that not only drives the housing expense higher, but it also doesn’t do anything beneficial for the consumer. PMI benefits the bank to protect against payment default. If you can rid yourself of PMI because you have 20% or more equity in your home, or can qualify for a special mortgage loan program such as lender-paid mortgage insurance, you’ll save money. PMI can average up to several hundred dollars per month in most instances. If you have the 20% equity needed to refinance a new non-PMI loan and are creditworthy, but simply choose to not refinance because the paperwork is too daunting, you’re throwing money away.

If you’re not sure where your credit stands, but you want to refinance, it’s a good idea to check your credit sooner than later. You can get two of your credit scores for free on Credit.com, and they’re updated monthly so you can watch for changes.

How quickly will you begin saving money?

No one should refinance unless the time frame it takes to recoup the closing costs on a refinance is sooner than the time in which they plan to sell the home. The most common form of determining how quickly you can recoup your money when refinancing is performing a “cash-on-cash” calculation. For example, if your closing costs are $2,800, and you’re saving a proposed $300 per month on a refinance, that’s a nine-month recapture. Fees divided by benefit equals recapture.

If you can benefit by refinancing by payment reduction, by cashing in on equity, or by interest savings or any combination of these benefits, remortgaging your home very well could make sense. Consider the following scenario: If you can recoup the refinance costs in under two years, and you don’t plan to sell for five years, you’re three years ahead, and the rewards are yours, no matter the future. Ultimately, weighing the pros and cons of a possible refinance in conjunction with selling the home is your decision. A good mortgage professional should be able to suggest mortgage options in alignment with your financial goals and objectives.

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