Buying a home is a significant milestone in every person’s life, and one of the most crucial decisions you will make while buying your home is where you should avail of a loan and which type of loan you should opt for.
The world of financial institutions for home loans is diverse, and you have multiple institutions. For instance, you can choose Valley Strong Credit Union for a home loan at low interest rates. On the other hand, commercial banks offer loans, but their eligibility criteria are slightly more stringent and have high-interest rates. Moreover, you also have government agencies that offer loans based on unique criteria.
Once you have decided on the financial institution for a home loan, the next step is to determine which type of loan will suit you. The following are the most popular types of loans that homeowners opt for:
Types of Home Loans:
There are four types of home loans: conventional mortgages, government-backed loans, fixed-rate mortgages, and adjustable-rate mortgages.
Conventional mortgage:
Conventional mortgage is the most popular type of home loan that is financed by private lenders, banks, and credit unions and has a flexible purpose that you can use to buy a primary or secondary residence.
These loans are mainly of two types: conforming and non-conforming loans.
- Conforming mortgage: Conforming mortgages are those loans that confirm the standards set by the Federal Housing Finance Agency, which includes guidelines regarding credit scores, debts, and loan size.
- Non-conforming Mortgage: Non-conforming mortgages don’t follow the guidelines given by FHFA and are considered a riskier prospect for lenders.
Government-backed loans
The US government is not a lender but plays a vital role in making the dream of home ownership a reality for every American. Government-backed loans broadly consist of the following:
- FHA loans: These loans are backed by the Federal Housing Finance Agency and are specifically designed for first-time home buyers and individuals with low credit scores. An FHA loan can be obtained with a credit score as low as 580 and a 3.5% down payment or a credit score of 500 and a loan down payment of 10%.
- VA loans are specially offered to eligible veterans, military personnel, and surviving spouses. The US Department of Veteran Affairs backs these loans and offers financial assistance at a minimum down payment and credit score.
- USDA loans: USDA loans are backed by the US Department of Agriculture and guarantee affordable loans to low-income people to buy homes in rural and USDA-eligible areas.
Fixed-rate mortgage:
As the name suggests, these loans have a consistent interest rate throughout the loan’s lifetime, meaning that your monthly mortgage payment will remain the same. Fixed loans typically have fixed tenure that varies from 15-30 years. However, these tenures are also flexible depending on the amount and type of loan. These loans are the best for people with a predictable monthly income and provide financial freedom because they can set their budget without considering any changing mortgage rates.
Adjustable rate mortgages:
In contrast to fixed mortgages, adjustable-rate mortgages have interest rates that change over time.
With this type of mortgage, a lower interest rate is set initially. After that, the rate can go significantly up or down at predetermined intervals. These loans are best for individuals who anticipate that interest rates will decrease.
Conclusion
Owning a home doesn’t have to be a dream anymore. With the proper knowledge and assistance, it can become a reality. However, before you avail yourself of a home loan, you should carefully gauge your financial condition and whether it will be viable to apply for the loan. Moreover, you should also check the interest rates provided by various lenders to determine which one will give you the best value. Only after carefully considering everything should you apply for a home loan.