Reprinted from Realtor.com
1:00 pm ET
January 7, 2016
If you’re shopping for a home, odds are you should be shopping for a home loan as well—and these days, it’s by no means a one-mortgage-fits-all model.
Where you live, how long you plan to stay put, and other variables can make certain home loans better suited to your circumstances, and choosing wisely could save you a bundle on your down payment, fees, and interest.
To learn about all your options, check out these common types of home loans and whom they’re suited for, so you can make the right choice.
The most common type of loan, a fixed-rate loan prescribes a single interest rate—and monthly payment—for the life of the loan, which is typically 15 or 30 years.
Right for: Homeowners who crave predictability and aren’t going anywhere soon. You pay X amount for Y years—and that’s the end. The rise and fall of interest rates (like the nationwide increase that followed the Fed’s action in December) won’t change the terms of your loan, so you’ll always know what to expect. That said, they’re best for people who plan to stay in their home for at least a good chunk of the life of their loan; if you think you’ll move fairly soon, you may want to consider the next option.
ARM loans offer interest rates typically lower than you’d get with a fixed-rate loan for a period of time—such as five or 10 years. But after that, your interest rates (and payments) will adjust, typically once a year, roughly corresponding to current interest rates. So if interest rates shoot up, so do your monthly payments; if they plummet, you’ll pay less.
Right for: Home buyers with lower credit scores. Since people with poor credit typically can’t get good rates on fixed-rate loans, an ARM can nudge those interest rates down enough to put homeownership within easier reach. These loans are also great for people who plan to move and sell their home before their fixed-rate period is up and their rates start vacillating.
While typical loans require a down payment of 20% of the purchase price of your home, with a Federal Housing Administration loan, you can put down as little as 3.5%.
Right for: Home buyers with meager savings for a down payment. These loans come with several caveats. First, most loans are limited to $417,000 and don’t provide much flexibility: Rates are typically fixed, with either 15- or 30-year terms. Buyers are also required to pay mortgage insurance—either upfront or over the life of the loan—which hovers around 1% of the cost of your loan.
If you’ve served in the United States military, a Veterans Affairs loan can be an excellent alternative to a traditional mortgage. If you qualify, you can score a sweet home with no money down and no mortgage insurance requirements.
Right for: Veterans who’ve served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves. That said, the VA has strict requirements on the type of home you can purchase: It must be your primary residence, and it must meet “minimum property requirements” (that is, no fixer-uppers allowed).
USDA Rural Development loans are designed for families in rural areas. The government finances 100% of the home price—in other words, no down payment necessary—and offers discounted interest rates to boot.
Right for: Families in rural areas who are struggling financially. These loans are designed to put homeownership in their grasp. The catch? Your debt load cannot exceed your income by more than 41%, and, like the FHA loan, you will be required to purchase mortgage insurance.
Also known as a gap loan or “repeat financing,” a bridge loan is an excellent option if you’re purchasing a home before selling your previous residence. Lenders will wrap your current and new mortgage into one payment; once your home is sold, you pay off that mortgage and refinance.
Right for: Homeowners with excellent credit and a low debt-to-income ratio, and who don’t need to finance more than 80% of the two homes’ combined value. Meet those requirements, and this can be a simple way of transitioning between two houses without having a meltdown—financially or emotionally—in the process.
Jamie Wiebe has written about home design and real estate for House Beautiful, Elle Decor, Veranda, and more. She loves vintage furniture, collecting fluffy blankets, and DIY-ing everything.
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