In an adjustable-rate loan, the interest rate varies along with the general financial market. Skylar Clarine is a data verifier and personal finance expert with extensive experience including veterinary technology and film studios. Unless you can buy your home with cash, finding the right property is only half the battle. The other half is choosing the best type of mortgage.
You're likely to pay off your mortgage over an extended period of time, so it's important to find a loan that fits your needs and budget. When you borrow money from a lender, you come to a legal agreement to repay that loan for a set period of time (albeit with interest). There are two components to paying your mortgage, principal and interest. The principal refers to the amount of the loan.
Interest is an additional amount (calculated as a percentage of principal) that lenders charge you for the privilege of borrowing money that you can repay over time. During the term of your mortgage, you pay in monthly installments according to a repayment schedule set by your lender. Another factor that goes into the price of a mortgage is the annual percentage rate (APR), which evaluates the total cost of a loan. APR includes interest rate and other loan charges.
Not all mortgage products are created equal. Some have stricter guidelines than others. Some lenders may require a 20% down payment, while others require as little as 3% of the home purchase price. To qualify for some types of loans, you need flawless credit.
Others are geared toward borrowers with less than stellar credit. The government is not a lender, but it does guarantee certain types of loans that meet strict eligibility requirements for income, loan limits, and geographical areas. Here is a summary of several possible mortgage loans. Fannie Mae and Freddie Mac are two government-sponsored companies that buy and sell most conventional mortgages in the U.
S. A conventional loan is a loan that is not backed by the federal government. Borrowers with good credit, stable employment history and income, and the ability to make a 3% down payment can generally qualify for a conventional loan backed by Fannie Mae or Freddie Mac, two government-sponsored companies that buy and sell most conventional mortgages in the United States. To avoid the need for private mortgage insurance (PMI), borrowers generally need to make a 20% down payment.
Some lenders also offer conventional loans with low down payment requirements and no private mortgage insurance. However, the FHFA sets a higher maximum loan limit in certain parts of the country (for example, in New York City or San Francisco). This is because home prices in these high-cost areas exceed the basic loan limit by at least 115% or more. Fannie Mae and Freddie Mac are generally unable to sell or buy non-conforming loans, due to loan amount or insurance guidelines.
Jumbo loans are the most common type of non-conforming loans. They are called jumbo because loan amounts generally exceed compliant loan limits. These types of loans are riskier for a lender, so borrowers generally need to show larger cash reserves, make a down payment of 10% to 20% (or more), and have strong credit. Low-moderate-income buyers buying a home for the first time often turn to loans insured by the Federal Housing Administration (FHA) when they can't qualify for a conventional loan.
Borrowers can put in as little as 3.5% of the purchase price of the home. FHA loans have more relaxed credit rating requirements than conventional loans. However, the FHA does not lend money directly; it guarantees loans from FHA-approved lenders. There is a downside to FHA loans.
All borrowers pay an annual upfront mortgage insurance premium (MIP), a type of mortgage insurance that protects the lender from default by the borrower for the life of the loan. FHA loans are best for low- to moderate-income borrowers who cannot qualify for a conventional credit product, or for anyone who is unable to pay a significant down payment. FHA loans allow a FICO score as low as 500 to qualify for a 10% down payment and as low as 580 to qualify for a 3.5% down payment. The Department of Veterans Affairs (VA) guarantees homebuyer loans for qualified military service members, veterans, and their spouses.
Borrowers can finance 100% of the loan amount with no down payment required. Other benefits include lower closing costs (which can be paid by the seller), better interest rates, and lack of PMI or MIP. Department of Veterans Affairs guarantees mortgages for qualified service members that do not require a down payment. VA loans are best for eligible active duty military personnel or veterans and their spouses who want highly competitive terms and a mortgage product tailored to their financial needs.
Department of Agriculture (USDA) Secures Loans to Help Make Homeownership Possible for Low-Income Buyers in Rural Areas Nationwide. These loans require little or no down payment for qualified borrowers, as long as the properties meet USDA eligibility rules. USDA loans are best for eligible rural homebuyers with lower household incomes, little money saved for a down payment, and who otherwise may not qualify for a conventional loan. Fixed-rate loans are best for people who plan to live in their homes for a long time.
If you want to pay off your home faster and can afford a higher monthly payment, a short-term fixed-rate loan (for example, 15 or 20 years) helps you reduce time and interest payments. It will also generate equity in your home much faster. Opting for a shorter fixed-term mortgage means that monthly payments will be higher than with a longer-term loan. Review the numbers to make sure your budget can handle the highest payouts.
You may also want to consider other goals, such as saving for retirement or an emergency fund. Fixed-rate loans are ideal for buyers who plan to stay there for many years to come. A 30-year fixed loan could give you leeway to meet other financial needs.
