4 Mortgage options defined
The decision to buy a home is a big one! Before you start shopping and touring homes, there is an important step you need to take: applying for a mortgage. Getting pre-qualified for a loan will make your offers more appealing to sellers, and it will also reassure you that the homes you're interested in are within your price range. But with so many options, which type of mortgage should you apply for? Here's a quick rundown of common mortgage types to help you decide.
Conventional Fixed-Rate Mortgages
A conventional, fixed rate mortgage has an interest rate that stays the same throughout the life of the loan. It is a good choice for stability—you will know, from the day you sign for the loan onward, how much your payment will be every month for the life of the loan.
Conventional mortgages are not backed by any government organization; they are 100% an agreement between you and the bank. Therefore, banks can be a bit choosy as to who they offer this type of mortgage to. You will need a substantial down payment—often 10 or 20%—and a credit score of at least 620-640.
Adjustable Rate Mortgages
An adjustable rate mortgage offers a low interest rate for the first several years. Then, the rate is adjusted—raised—after that introductory period. For many home buyers, an ARM is not the ideal way to go. The payments may become unwieldly later on if your earnings do not increase as planned. However, there are times when an ARM is a good choice:
- If you'll be selling the home before the introductory period is over, you can enjoy lower payments in the meantime.
- If you are certain your pay will increase, such as if you just finished medical school and will be accepting a position as a physician in the next year, you may not have any trouble with the higher payments down the road.
FHA Mortgages
This is one of the most common mortgage types for first-time buyers. An FHA mortgage is one that is insured by the Federal Housing Administration. That means that if you stop paying on the loan, the FHA will pay the bank. This removes some of the risk that the bank takes on in lending to you.
FHA mortgages require smaller down payments than conventional loans, sometimes as low as 3.5%. They also have lower credit score requirements. However, homes do need to meet certain standards in order to qualify for an FHA loan, and taking out this type of loan on a house that needs a lot of fixing up is not usually an option.
VA Mortgages
VA mortgages are available only to veterans, active service members, and in some cases, the spouses of military members. They offer very good terms for those who qualify. No down payment is required, and credit score requirements are low. The Veterans Administration secures the loan and will pay the bank if you default. If you are a qualifying service member, this is one of the top mortgage types to consider.
There are other mortgage types on the market, such as an interest-only mortgage that has you pay only the interest on your loan for the first 5 or 10 years, and a balloon mortgage, that has you make payments over time, followed by a lump payoff of the principle. However, these mortgage types are rarely used; almost all buyers choose one of the four options discussed above. Talk to a lender if you need additional advice as to which loan is right for you.
Equal Housing Lender