What Type of Home Loan is Right for Me?

 

Purchasing a home brings with it a plethora of decisions, from how much to spend to where to live. Financing your home is one of the biggest decisions you will make, because it determines your family’s financial outlook for years to come. Use this handy guide to determine the right home loan for your circumstances.

FHA Home Loan

Federal Housing Administration home loans have helped individuals purchase homes since 1934. The loan FHA offers can make home buying more realistic for individuals lacking a large down payment or high credit score. As a result, this type of loan, which is less rigid than other types, works well for many first-time home buyers because it’s easier to qualify for. In essence, the FHA insures the loan and connects you to lenders willing to work with your unique financial situation. In exchange for the insurance and easier access to willing lenders, you will pay a monthly insurance premium on your loan as part of your mortgage payment.

Several factors determine your ability to acquire an FHA loan. Being an FHA first-time home buyer can help you secure this loan. First-time home buyers may need to put down as little as 3.5 percent on a home. FHA loans’ credit score requirements are typically lower than those for other loans, as well. In fact, minimum credit scores for FHA loans may be as low as 500, and a previous bankruptcy does not necessarily prevent you from acquiring the loan. Credit score requirements and down payment requirements are connected — the higher your credit score, the lower the down payment.

As your financial situation evolves, you might choose to refinance with an FHA loan. How to refinance your FHA loan depends on your needs. Individuals with conventional loans may also choose to refinance to an FHA loan. Conversely, if you currently have an FHA loan but a conventional loan is now feasible for your family, this option might be more inexpensive over the long term, making it worthwhile to refinance.

30-Year Fixed Loan

A 30-year fixed loan is the most common type of home loan. This conventional loan appeals to many home buyers because the interest rate remains fixed for the life of the loan, which means your mortgage payment won’t shift based on variations in the current market. Most conventional home loans come with a 30-year term, meaning you pay off the loan in that time frame. This term offers the lowest monthly payment. If you can afford a higher monthly payment, you can opt for a 15-year term, which results in substantial savings in interest payments over the life of the loan. While loan terms vary, many conventional fixed loans require just a 5 percent down payment, which makes it attainable for many home buyers.

Adjustable-Rate Mortgage

Adjustable-rate loans rely on fluctuating interest rates, which means the monthly payment on your loan can vary. When interest rates are low, you can score big savings on your loan, but should rates skyrocket, so will your monthly payment. Many of these loans begin with a fixed-rate period, which can vary from three to 10 years. If you plan on living in your home only during that fixed-rate period, you can enjoy substantial savings on interest, because the interest rate will be significantly lower during that fixed period. However, if you plan on living in your home for the life of the loan, your payment amount will be subject to the ever-changing market. Before jumping into an adjustable-rate mortgage, make sure you can afford the worst-case scenario payment should interest rates skyrocket.

Buying a house can be an exciting but stressful time. Choosing the right loan for your family’s needs makes this challenging process easier.

 

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