What Is the Best Loan for Me? a Breakdown of Popular Loan Options
Purchasing a home is no doubt exciting, but before you even consider house hunting, you should think about what type of mortgage will best suit your needs.
Depending on your immediate needs and long-term goals, the best type of loan option for your situation can vary. Here is everything you need to know about the most popular loan options and who they work best for.
A conventional mortgage is a popular option for first-time buyers and seasoned homeowners alike, reported Experian. They are distinct from other loans because they are not backed by a government agency. They are furthermore broken down into "conforming" and "non-conforming" loans:
- Conforming: Loans that follow the lending rules set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Often easier to qualify for with a lower down payment.
- Non-conforming: Loan conditions can vary from lender to lender. Usually a smaller or larger mortgage size than conforming loans.
Banks, credit unions and private mortgage lenders are all likely to offer conventional loans, many of which have similar perks to government-insured mortgages. For instance, with a conforming loan it's possible to pay lower or no down payments depending on the lending rules in place.
These loans usually run for 30 years, but it is possible to qualify for a 15- or 20-year conventional mortgage depending on the lender you work with.
You may want to consider a conventional loan if you are confident in your financial portfolio. If you have a high credit score (over 620 is usually required for a conventional mortgage), steady income with a strong financial past, and can afford a down payment of at least 3%, this option could be ideal.
Homebuyers can begin refining their financial profile before purchasing a home to improve their chances of receiving a favorable conventional loan.
Fixed-rate mortgages are a great idea for individuals or families ready to settle down, or those who desire a consistent monthly payment. As NerdWallet explained, with a fixed-rate mortgage, homeowners can lock-in what their monthly payments will be over a 15-, or more typically, a 30-year period.
The state of the current market could influence a homeowner's decision between a fixed-rate or adjustable-rate mortgage, but remember, if rates do drop or your home appreciates over the years, it's possible to refinance. You are not locked-in to your current mortgage forever with a fixed-rate loan. Refinancing is a viable option to take advantage of lower rates in the future.
If you have found your dream home or see yourself staying in one place for a while, a fixed-rate loan can give you favorable rates and stability in payments that are easier to budget for.
On the opposite end of the loan spectrum are adjustable-rate mortgages (ARM). As the name suggests, the rates of these loans reset at specific intervals during the full loan term in relation to market activity. However, most ARMs do require a fixed-rate for the first few years before the loan resets.
This type of mortgage usually appeals most to first-time homebuyers looking for a starter property that they plan to grow out of. Or, as NerdWallet described, someone advancing in their career that could require a move in a few years. With an ARM, homeowners can benefit from a lower introductory rate and the flexibility to move or upgrade before the fixed-rate period ends.
If you're comfortable with this flexibility, thinking in the short-term and the inherent level of risk that comes with an ARM, this loan could help you save on interest payments. Just remember, if the market shifts, your mortgage payments could skyrocket and become unaffordable. Do your research on ARMs, talk with a trusted financial advisor and consider your current economic situation before choosing this mortgage.
Government-insured loans are an alternative to conventional loans. According to Credit Karma, these mortgages are usually underwritten by private lenders with backing from the U.S. government. This assurance that the government will pay a portion of the loan in case the borrower defaults gives banks and private mortgage lenders more confidence in the transaction.
Many government-insured loans are meant to stimulate the economy and assist individuals who may not be able to afford high up-front costs needed to purchase a home. These loans are usually for specific individuals and circumstances, so make sure you fully understand the qualifying criteria of each. Some examples of government-insured mortgages include:
- VA Loans: If you are a prior or current Reserve/National Guard member of the Armed Services or certain other types of government employee, you may qualify for a VA Home Loan through Veterans Choice. The VA backs a portion of the loan so lenders usually require little-to-no down payment and low interest rates. Find out if you're eligible for a VA Loan with Veterans Choice to understand your options.
- FHA Loans: Federal Housing Administration mortgages offer down payments as low as 3.5%. You will pay for mortgage insurance for the life of the loan, but they are more forgiving of low credit scores.
- USDA Loans: The Department of Agriculture might guarantee a low- or no-down-payment mortgage if you plan to live in a rural area. It can sometimes cover closing costs as well.
Just like it sounds, jumbo mortgages are large. Bankrate explains they are technically just conventional loans that have non-conforming loan limits - usually, the home price exceeds the federal mortgage maximum. These loans allow homeowners to borrow more money, and interest rates are usually comparable with other conventional loans.
If you have a lot of savings and are looking to move to an affluent area, a jumbo loan may be just what you need. Keep in mind, most lenders will be hesitant to give out jumbo loans unless the borrower has excellent credit and steady high income. A large down payment - between 10% and 20% - is also needed.
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