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No two borrowers are exactly alike — that’s why home loans come in so many varieties. The trick is finding the right loan for you. Before you make a decision, you’ll want to get with a mortgage professional and chat through your options. Here’s a quick rundown of the different types of home loans out there that might be a good fit for your home purchase.
Fixed vs. Adjustable
One of the biggest and more important choices today is between fixed rate loans and adjustable rate mortgages (ARMs). A fixed rate loan gives you a consistent monthly payment for the life of the loan. Your interest rate won’t change, so you’ll know exactly how much you’ll be paying in principal and interest each month until your loan is paid off. These loans are ideal if you plan to stay in your home for a long time.
With ARMs, the initial interest rate is typically lower than that of a fixed rate loan. But it’s important to keep in mind that the interest rate and monthly payment for an ARM could change over the life of your loan.
Loan Types
There are several types of home loans, including:
- Conventional loans
- Government loans
- Jumbo loans
A conventional loan is the standard home loan. It can be a good option for people with good credit and a sizable down payment, as well as for people who can fully document all of their income and assets. Conventional loans typically require a minimum of 5 percent down, a minimum 15 to 30-year term, and are available with a fixed or adjustable rate. Jumbo loans kick in for people who need larger loan amounts that exceed conventional loan limits, and can go up to $2,000,000 (depending on the location). Government loans are sponsored or insured by government agencies, and include:
- FHA loans
- VA home loans
- USDA mortgages
These types of loans are designed to make it easier for more people to buy homes. Some will finance up to 97 percent to 100 percent of the purchase price of your home, plus closing costs. Credit score and income documentation requirements are usually more relaxed. Keep in mind that these loans have more specific requirements.
Additional Customization Options
Many borrowers don’t realize that they may be able to customize their rate, payments, and features. For example, you may be able to pay discount points at closing to obtain a lower rate and payment for the life of your loan. That’s great if you plan to stay in your home for a long time, but if you need to minimize closing costs and just need a short-term loan, you may opt for no points and a slightly higher rate. You may also be able to structure your loan so there is no mortgage insurance.
Choosing the Right Loan
There are many home loan options to choose from when buying or refinancing a home. It’s smart to know your goals and your limits to find the best option. For example, if you’re buying a $350,000 home with a 20 percent down payment and plan to make this your long-term family home, a 30-year fixed rate conventional loan could be a great fit. But if you are refinancing a home that you plan to sell in the next five years, then an adjustable rate mortgage could be a better move.
