Buyers can easily get overwhelmed by the different mortgage options. Conventional? Government-backed? Fixed rate or adjustable? Even within these categories there can be different options.
Although a lender will be able to advise you on the type of loan that is a good fit for you, you should have an understanding of how each work and the costs and benefits of each:
Fixed Rate Mortgage: Fixed rate mortgages are exactly that – the mortgage rate remains fixed for the life of the loan. Monthly principle and interest payments are fixed.
Adjustable Rate Mortgage: These are also called ARMs. This type of loan has the potential to have monthly payments that change along with the interest rate. There is usually an initial period of time where the interest rate does not adjust (usually “1-year” ARM, 3-year, 5-year, or 7-year). How often the interest rate adjusts depends on the loan. Since interest rates do change over time, the payment can either be higher or lower depending on the difference in the interest rate. For example, if someone took out a loan now when interest rates are at very-low levels, it is unlikely that interest rates will continue to be this low when the interest rate adjusts. Furthermore, ARMs generally start out with a lower interest rate than a fixed rate loan.
If you know your future plans when securing your loan, this may help you choose the right type. For example, if you are planning on staying in your home for only seven years, it might save you money to use an adjustable rate mortgage with the expectation that you will be moving and taking out a new loan before the interest rate adjusts. You want to make sure you can afford your monthly payment now and later.
In addition to fixed rate mortgage and adjustable rate mortgages, mortgages may also be either “conventional” (meaning funded by a bank or other lender) or a “government-backed” loan. Government-backed loans are backed by the federal government, including the Department of Veteran Affairs or the Department of Housing and Urban Development. The government agency is “insuring” the loan, although the funding may still be provided by a bank.
So why the two different types of loans? The Department of Housing and Urban Development typically has less-stringent lending qualifications, making it easier for some buyers to get a loan. For example, at the time of this writing, the down payment on an FHA loan (by the Federal Housing Administration) can be as low as 3.5% as opposed to a private loan which require 10-20%.
Below are the most-typical types of government loans for our area include:
FHA (Federal Housing Administration) Loan: The three benefits of this loan are the low down payment, lower credit score requirements, and additional monies to fix the home up can be included in the loan amount. Buyers who want to take advantage of an FHA loan first need to find an FHA-approved lender. I have a full list of our local FHA-approved lenders in the event these loan parameters sound like a good match for your needs.
VA Loan: These are managed by the Department of Veteran Affairs and are reserved for military service members. The benefit of a VA loan is it does not require a down payment. If you are a military service member, I will help you find a property, but when it comes time to apply for the loan, your Veterans Administration office will point you in the right direction and help you with the application process.
USDA Loan: These loans are managed by the United States Department of Agriculture and are reserved for rural areas. They are available to low-income residents. USDA loans are available in rural areas of Benton and Franklin County.
As you can see, there are pros and cons to both conventional and government-backed loans. If you are thinking about buying a home in the near future, let me set up a meeting with a lender who can guide you through the ins and outs of each, and help you determine the best loan for your needs and comfort level.