If you’re a first-time homebuyer 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.
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 mortgage loans exist. To learn about all your home-buying options, check out these common types of home mortgage loans and whom they’re suited for so you can make the right choice.
1. 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. One type of fixed-rate mortgage is a jumbo loan. Homeowners who crave predictability and aren’t going anywhere soon may be best suited for this conventional loan.
2. 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 while—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. If interest rates shoot up, so do your monthly payments; if they plummet, you’ll pay less on mortgage payments. Homebuyers with lower credit scores are best suited for an adjustable-rate mortgage.
3. 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. Homebuyers with meager savings for a down payment are a good fit for an FHA loan.
4. 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. VA loans are for veterans who’ve served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves.
5. 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. Borrowers in rural areas who are struggling financially can access USDA-eligible home loans.
6. 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. Homeowners with excellent credit and a low debt-to-income ratio, and who don’t need to finance more than 80% of the two homes’ combined value.
If you want to find out more about home loans or if you have other real estate-related questions, just click here.