Purchasing a home is sure to
be an exciting moment in everyone’s life. However, it also requires you to
study the financing options carefully. The entire process can be quite
overwhelming as you may have to choose from different types of home loans. You need to do some homework in order
to nail the down payment amount and also your budget.
This guide will help you
choose from different mortgages if you are having a hard time choosing from the
mortgage loan options available.
- Conventional
Mortgage
This home loan is not insured
by any federal government. There are two kinds of conventional loans: Conforming
and Non-Conforming Loans. In a Confirming loan, the loan amount falls
within the range set by government-sponsored enterprises such as Fannie
Mae* and Freddie Mac**. The loans that don’t fall under
these guidelines are referred to as non-conforming loans.
The major advantage of
choosing this type of mortgage loan is that it can be used for an
investment property, primary home, or for a second home. The overall borrowing
costs here are lesser in comparison to others; however, you need to have a debt-to-income
ratio greater than 45 percent. It is suitable for borrowers with strong credit,
employment history, and a stable income.
- Jumbo
Mortgage
This conventional mortgage has
Non-Conforming limits. This implies that the home price exceeds the federal
loan limit. The maximum conforming loan amount for 2020 for a single-family
home is $510,400***. The ceiling is high in high-cost areas. Jumbo
loans are quite common in higher-cost areas and require an in-depth
documentation process. Though you can borrow more money, you need to make a
down payment of a minimum of 10 to 20 percent of the home loan amount.
- Government-Insured
Mortgages
The US government plays a
crucial role in helping Americans become homeowners. There are currently three
government agencies+ that back mortgages in America –
- USDA
Loans (The U.S. Department of Agriculture) - FHA
Loans (The Federal Housing Administration) - VA
Loans (The Department of Veterans Affairs)
These housing loans help
individuals who do not qualify for conventional loans. Here, the credit
requirements are quite relaxed and you don’t have to make a large down payment.
However, you will have to bear higher borrowing costs with these mortgage
loans. You may also be required to provide substantial documentation when
applying for these types of mortgages.
- Fixed-Rate
Mortgages
Fixed-rate mortgages remain at
the same interest rate throughout the life of your loan. This implies that your
monthly payment remains the same. You can pay more interest with a long-term
loan. In this kind of mortgage, it will take some time to build equity on your
property. Also, interest rates are quite high.
- Adjustable-Rate
Mortgages
These have fluctuating
interest rates that can either go down or up with market conditions.
Some of these products carry a fixed interest rate for a few years before it
changes to a variable interest rate for the remainder of the loan repayment
term. You will enjoy a lower fixed rate during the first few years of securing
the homeownership. If you don’t have any plans to stay in your home after a
couple of years, then this mortgage will save considerable money on interest
payments.
- Other
kinds of Home Loans
Apart from the
above-mentioned mortgages, there are plenty of other options that you can
consider. You can choose from Construction Loans, Interest-Only Mortgage Loans,
Balloon Mortgages, and more depending upon your requirements. If you want to
construct a home, then opting for a Construction loan would be the right
choice.
With an Interest-Only mortgage,
the borrower just pays interest on the loan for a set period, and after that,
you start paying the principal amount. You won’t build equity quickly with this
kind of loan as you are paying only the interest in the initial days. These
loans are best for people who can sell or consider refinancing options at a
later stage.
Balloon mortgages require you to make a large
payment at the end of the loan tenure. Initially, you will be making payment
for a 30-year term within a short time frame. In the end, you will be making a large
payment on the outstanding balance.
Conclusion
You can consider the
information provided here as a starting point in your search for the most
optimum mortgage suited to you. You may have to do an in-depth study on each of
these kinds of home loans to learn about their pros and cons before finalizing
anything.
Before choosing any mortgage
option, you should analyze your financial situation thoroughly. Reviewing your
needs and circumstances and doing your research will help you choose the most
suitable option as per your needs.
References:
* https://en.wikipedia.org/wiki/Fannie_Mae
** https://en.wikipedia.org/wiki/Freddie_Mac
+ http://www.loanlimits.org/government-insured-mortgage-loans-explained/
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