Different Types of Loans

There are many different types of loans available for your home purchase.  The right loan product for you will depend on the type of property you are purchasing, property condition, your credit history, your budget and savings for a down payment, and the length of time you plan on owning the home.

A Fixed-Rate Mortgage

Allows you to lock in an interest rate so your monthly payment will stay the same over the life of the loan (only slightly changing with tax & insurance changes).

• A 30-year fixed-rate mortgage offers a lower monthly payment for the loan amount (for this reason, it’s more popular than the 15-year option).
• A 15-year fixed-rate mortgage typically offers a lower interest rate but a higher monthly payment because you’re paying the loan amount off faster.

Adjustable-Rate Mortgage (ARM)

Good if you plan to live in a home for a short time or you expect your income to go up to offset potentially higher future rates.

• Offers a lower interest rate than a fixed-rate mortgage for an initial period of time — maybe, five or seven years — but the rate can fluctuate after the introductory period is over, depending on changes in interest rate conditions.
• Has caps that protect how high the rate can go.
• Different lenders may offer the same initial interest rate but different rate caps. It’s important to compare rate caps when shopping around for an ARM.
• Adjustable-rate mortgages have a reputation for being complicated. As the Consumer Financial Protection Bureau advises, make sure to read the fine print.

Which fixed-rate or adjustable-rate mortgage you qualify for introduces a whole host of other categories, and they fall under two umbrellas: conventional loans and government loans.

Conventional Loans

Originated in the private sector, and is not insured by the government.

• Often a credit score of 620 or above.
• 3% Down payment to qualify.
• Renovation Financing options are available from 5% down.
• Very competitive interest rates.
• 0% down with down payment assistance programs.

Government Loans

Originated in the private sector, but is insured by the government.

FHA LOAN

Federal Housing Administration

• Low down payment of 3.5% with minimum credit score of 580 or sometimes lower.
• You must pay an upfront mortgage insurance premium (MIP) and an annual premium of 0.85%. Currently, the MIP is 1.75% of the loan amount ($1,750 for a $100,000 loan). This can be paid upfront at the closing or can be rolled into the monthly mortgage payment.
• FHA 203K Renovation financing loans available.
• 0% down with down payment assistance programs.

VA LOAN

 U.S. Department of Veterans Affairs

• • Available to active or retired military (or a veteran’s surviving spouse).
  • 0% down payment.
  • The VA only allows lenders to charge 1% maximum to cover the costs of originating and underwriting the loan, so you save money at closing. There is, however, an additional upfront, one-time funding fee of 2.15%.
  • No mortgage insurance.

USDA LOAN

U.S. Department of Agriculture & Rural Development

• • Limited-income homebuyers in towns with populations of 10,000 or less, or that are “rural in character,” meaning that some areas that now have bigger populations are grandfathered in.
  • Lower interest rates than non-USDA loans.
  • Down payments can be as low as 0%.
  • Lenient credit score requirements.
  • Upfront mortgage insurance fee of 1% of the loan amount and an annual mortgage insurance premium of 0.35%.

Shop Around for a Mortgage

Now that you have a general idea of the different types of loans available for your home purchase, it’s important to shop around.  There are many types of lenders as well.  Starting with a mortgage broker is usually a good choice because he or she can help you compare lender’s rates and terms.  Be sure you have all the required documentation compiled to get pre-approved for a mortgage.