Not all home loans and interest rates are right for everyone. You have options! And it’s important to choose the mortgage loan that best suits your financial circumstances, because it can save you a lot of money and ensure that your mortgage payments are likely to stay within your means. To guide you to the right home loan and home loan rate for you, we’ll walk you through the different types of home loans and the pros and cons of each.

Fixed rate mortgage

As the name implies, in a fixed-rate mortgage where the interest you pay remains fixed for the entire term of your mortgage loan (usually 15 or 30 years), although there are some shorter-term fixed-rate loans ). These are the types of home loans commonly taken out by different types of homebuyers.

Most homebuyers prefer fixed-rate home loans because it gives them long-term stability, says Katie Miller, Navy Federal Credit Union’s vice president of home lending. In fact, these conventional loan with predictable interest rates are ideal if you plan to stay in your home for at least five years, and the longer you stay, the more sense a fixed-rate home loan with consistent monthly payments will make. It is also easy to refinance these types of loans.

But keep in mind that having the peace of mind of a fixed rate comes at a price. Fixed rate loans generally have higher interest rates than the initial rates of adjustable rate loans. More about these below…

Adjustable Rate Home Loans

An adjustable rate home loan, or ARM, is a home loan that offers a lower interest rate for an introductory period. After that period, usually two to five years, the interest rate becomes adjustable up to a certain limit based on market conditions. If certain economic indices change, the interest rate on your adjustable home loan could increase after this introductory period and your monthly payments could skyrocket. If the rates go down, your monthly payments could stay the same or even go down as the interest rate goes down. Therefore, choosing an ARM can be a bit risky. If you think you’ll be staying longer than the introductory period, pay special attention to the maximum interest rate, which is often much higher than a fixed-rate loan.

However, if you plan to sell the house soon, an adjustable rate home loan may be better. You’ll have the advantage of lower mortgage payments as long as you live in the home as long as you’re willing to move out before the introductory rate period ends. And because your bank lender will qualify you based on a lower monthly payment, you could buy a more expensive home than you could with a fixed-rate home loan.

FHA home loan

If your finances aren’t doing so well, a Federal Housing Administration loan could be a great option for buying a home. FHA home loans were created for low- and moderate-income people who would otherwise be locked out of the real estate market because of high debt-to-income ratios or bad credit. With qualifying credit scores starting at 580, FHA loans also allow you to qualify for a home loan at the prevailing interest rate with a down payment as low as 3.5%. These home loans are insured by the government, which guarantees that the bank lender will not lose their money if the borrower defaults.

The downside is that because the federal government insures these home loans, borrowers have to pay a mortgage insurance premium up front in addition to their down payment. For now, the fee is 1.75%, or $5,250 on a $300,000 home loan. Borrowers will also have to pay annual mortgage insurance, plus or minus 0.85% of the loan amount, or $2,550 more per year, in addition to their monthly mortgage payments. FHA loans are generally capped at $417,000. (In some more expensive areas, the limit is $625,000.) This means that your buying power is limited if you use an FHA loan, although if you’re looking for a smaller home loan, this won’t be a problem.

VA home loan

The US Department of Veterans Affairs Home Loan Program, which began when the GI Bill of 1944 was created, gives active and retired military personnel the opportunity to purchase a home with one down payment. $0 down and no mortgage insurance premium. VA home loans also offer very attractive interest rates.

However, “the requirements are very strict” for VA home loans, Miller says. VA lenders generally require a credit score of 620, and each VA home loan requires a special appraisal for purchase that includes an appraisal of the property and a thorough home condition check, making pre-approval more difficult.

USDA Home Loan

This is another type of government-backed home loan, offered by the US Department of Agriculture Rural Development in cities with populations of 10,000 or less (see the USDA website ) to see if your location qualifies). USDA home loans for low-income homebuyers can have as low as 0% down. The downside is that even though they don’t require a down payment, they charge an upfront mortgage insurance fee of 2% of the loan amount and also have a 0.5% monthly mortgage insurance premium, which requires you to pay more. during the term of the loan.

Jumbo Mortgage Loan

If you live in an expensive housing market, you may end up with a jumbo home loan, a home loan that exceeds the limits of government-sponsored loans. In most of the country, these are loans of more than $417,000. In areas where the cost of living is extremely high (like Manhattan and San Francisco), the threshold goes up to $625,000.

But keep in mind that because the amount of money they’re going to lend is so high, jumbo home loans typically require homebuyers to make a higher down payment (up to 30% depending on the bank lender) and have a credit score. credit of at least 680.

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