After saving for several years and cleaning up your credit, you are finally ready to look at the various options for lending you are ready to buy a house. Although there are many big and exciting things that happen in life, buying your first home is one of the most exciting. After all, this step says that you can now be taken seriously, that you are responsible.
Since you have taken the time and care to save enough money for your down payment and closing costs, as well as dedicated time to cleaning up your credit you now need to be just as careful when it comes to choosing the right type of home loan and lender. The good news is that a number of great mortgage types are available from which you can choose.
The type of home loan you go with will depend on several factors such as the number of years you expect to live in your home, what your other financial obligations are, and the current interest rate. However, you should also think about things such as putting your kids in college. In this case, an Adjustable Rate Mortgage (ARM) might be the better solution. To help you understand your lending options better, we have broken loans down for you to use as a guide:
Fixed Rate Mortgage (FRM) – This type of loan locks in the current interest rate for the entire life of the loan. Therefore, if you were to lock into 6.5% and your loan was for 30 years, you would always pay 6.5% interest throughout all 30 years. The benefit is that you always know how much your monthly payment will be, helping you budget better. However, it is possible that your homeowner’s insurance and property taxes change.
Adjustable Rate Mortgage (ARM) – With this type of loan, the interest rate would change based on the current market. Typically, you might pay a few points less than you would with an FRM but you do need to remember that your monthly mortgage payment would vary. With an ARM, you also have a number of options. For example, if you were to choose a 10/1ARM, that means you could lock into a low interest rate for the first 10 years of the loan and then for every year of the remaining 20 years, you would pay the current market rate.
Balloon Loan – This type of mortgage offers an initial interest rate that is lower than what you would get with an FRM. This rate would remain for five to seven years, at which time it would balloon. Now, the one thing to remember with a Balloon Loan is that when the final payment is due, you would be required to pay off the entire loan.
The major benefit of a Balloon Loan is that the payments each month, at least for the first five to seven years, will be low. The reason is that they will be amortized at the lower interest rate spread over the total length of the loan. If you to pay your home off, sell it, or refinance it, then a Balloon Loan is a great option.
In addition to the above standard loans, keep in mind that you have many other lending options – some that include:
Government Loans – You should always ask your lender about current government loans, which are designed to lower the cost of a mortgage so more people can become homeowners
VA Loans – If you have served time in the military, you can qualify for a VA loan that offers standards for qualification that are much more relaxed than that of standard loans
Rural Housing Service Loans – With an RHS, you are guaranteed a loan through approved lenders or direct loans that have government funding.
Reverse Mortgage – In this case, you would pay money for the time you live in the home. The focus of an RHS loan is for people 62 years or older that own their own home but have tight cash flow.
Conventional Loan – This loan is in the category of Fannie Mae or Freddie Mac, which includes limits that would change annually based on the price for single-family housing prices.