Whether you are a first time home buyer or an experienced one, you probably have questions to ask your mortgage lender on finding the right loan for your situation. There are various loan types and none are a one size fits all. A great starting point for your mortgage research is to first understand the different loan options and loan types. Then you can compare each loan to your financial situation with the assistance of a mortgage professional to select the home loan that is best suited for you.
Loan options are important to determining loan type. Certain loans give you the option to choose whether you want a fixed rate or variable rate while others only have one rate type. You should look at the pros and cons of fixed rate and variable rate. This will help you determine what type of loan you want to apply for.
A mortgage with a fixed rate means the interest rate does not change during the life of the loan. The loan term is usually 15 years, 20 years, or 30 years and your monthly payment will stay the same each year. A major benefit of a fixed-rate mortgage is you can accurately budget your home owner expenses because your principal and interest payments do not change.
A con of a fixed-rate mortgage is the interest payments are usually higher than a variable-rate mortgage, a.ka. an adjustable-rate mortgage, when the term is longer than 15 years. Another disadvantage of a fixed-rate home loan is it will take more time than an adjustable-rate loan to build home equity.
The interest rates of an adjustable-rate mortgage changes depending on the market. Typically, there is a fixed interest rate for a couple of years in the beginning and then the loan restarts to a variable interest rate. A major benefit of this loan option is the fixed rate in the beginning of the loan is usually lower than a fixed-rate loan. This translates to you saving money on interest payments.
A big disadvantage of this option is your mortgage payments can become too high for you to afford. Another con is if your home value falls, it can be a challenge to sell or refinance your home before the loan rate becomes variable.
The common loan types are conventional loans, FHA loans, and VA loans. Conventional loans can have variable-rates, but usually are fixed-rate. The federal government does not back these loans, so qualifying for one is more difficult than loans that are federally insured or guaranteed. If you do not have at least 20 percent in home equity, which means you have a Loan-to-Value ratio higher than 80%, you will need to buy private mortgage insurance. You can avoid PMI with this loan type if you pay 20 percent down of the home price.
You may want to go through these strict requirements because these loans are usually less expensive than guaranteed loans. You can decide if you want a conforming or non-conforming conventional loan. A conforming loan follows Fannie Mae or Freddie Mac guidelines. For example, the 2020 conventional loan limit is $510,400 due to the guidelines set by these government-sponsored enterprises.
A non-conforming loan follows guidelines set by the lender that underwrites it. Hence, these loans can be jumbo loans, which have limits above conforming loans and higher interest rates. These loans are designed for luxury properties and highly competitive markets. They can have unique requirements and tax implications.
A FHA loan is from the Federal Housing Administration. These loans require a down payment as low as 3.5% and have more liberal underwriting requirements than conventional loans. All FHA loans require private mortgage insurance. Still, these FHA loans are very popular with first time home buyers.
VA loans are well known to even members outside of the armed forces. Did you know the U.S. Department of Veteran Affairs does not actually underwrite these loans? The VA partners with qualified lenders that provide these loans to active service members and veterans. These loans usually match the borrowing limit of conforming conventional loans, but have more relaxed application requirements. For example, a qualified veteran can buy a home with a VA loan at a competitive interest rate without putting money down.
You can see there are many options to choose from when it comes to home loans. Our buyer’s agents can recommend reputable lenders to work with you on finding the best loan for your situation. We understand that a lender can heavily impact your overall home buying experience. That’s why we only recommend the best in the finance sector to assist our clients in getting them into their dream home.