The process of homeownership has changed dramatically over the last several years, with more types of mortgage lenders and loans available to home buyers in 2017 than ever before. You may be wondering, what are these different types, and what are the pros and cons? Furthermore, which type or combination is right for me? Let me break it down for you and explain the basics of what your options are. Learn More Now.
Fixed vs. Adjustable Rate
When choosing your loan type, one of the first distinctions you must make is whether you’re looking for a fixed-rate, or an adjustable-rate loan. An experienced mortgage lender will have great advice. All loans have to be one or the other, or a combination “hybrid” of the two. These are the differences below:
Fixed rate mortgage loans are called so because the interest rate and the monthly payment remain “fixed” for the entirety of the loan term. It will never change or fluctuate, for every month and year you make payments. Even for longer-term options that can last up to 30 years, it remains the same.
Adjustable-rate mortgage loans (ARMs) will have interest rates that “adjust” from year to year. Most ARM loans will have an initial period of fixed payments before switching to annual fluctuation. These are known as “hybrid” loans.
Of course, each of these options has their pros and cons. The benefit of a fixed loan lies in its stability, although this is paid for with a consistently higher interest rate. While an ARM loan may be higher or lower depending on the year, the initial fixed payments interest rates are considerably lower. But, with the uncertainty of the market, you could end up paying for that as well as your loan progresses.
Government-Insured vs. Conventional Loans
Just as you must choose between fixed and ARM loans, you must also decide if you’d like your loan to be government insured, or opt for a conventional or “regular” loan instead. The differences are explained below:
Conventional home loans are not backed, insured, or guaranteed by the federal government in any way, but rather operate through private companies and banks.
FHA Loans are through the Federal Housing Administration, managed by the federal government and are available to all types of borrowers. They ensure the lender against any potential loses from a default. The advantage is it allows for a low down payment, but this is made up for in increased monthly payments to include the mortgage insurance. Ask your Lender for more detail.
VA Loans are similar to FHA loans but are managed through the Department of Veteran Affairs and only available to military service members and their families. The biggest advantage to this program is that borrows may qualify for zero down payment on their home.
USDA/RHS Loans are offered to rural borrowers who qualify as low or modest income residents according to their county. They are insured by the U.S. Department of Agriculture and managed by the Rural Housing Service.
The important thing to remember about choosing your mortgage loan is that these different types can be combined in a number of ways. Whether you opt for a conventional or government loan, you can still choose between fixed or adjustable rates.
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