Know the Six Mortgage Loan Types
When it comes to mortgages, you have choices. By doing research and working with professionals, you can find out what’s right for you.
30-year fixed-rate
The 30-year fixed-rate mortgage remains the most popular mortgage type for homebuyers. That’s because it comes with the lowest monthly payment thanks to its longer term.
With this loan, your interest rate will never change. The rate on the last day of your loan will be the same as on your first day. You’ll repay this mortgage with regular monthly payments over 360 months, or 30 years.
Of course, you don’t have to hold onto this mortgage for the full three decades. Most homeowners will sell their homes before they make 30 years of mortgage payments.
The benefit of this mortgage is its lower monthly payment. The downside? You will pay significantly more in interest depending on how long you hold onto this loan.
15-year fixed-rate
The 15-year fixed-rate mortgage works much like the 30-year version, but with a shorter term of 15 years. Like the 30-year version, the interest rate on this mortgage does not change over time.
Because of the shorter term, you’ll make higher monthly payments. But this loan is less expensive over the long run because you’ll pay significantly less in interest. You’ll need to decide whether you’re more interested in the lower payment of a 30-year loan or the lower cost of a 15-year loan.
Adjustable-rate mortgage
An adjustable-rate mortgage, or ARM, has an interest rate that changes during the loan term. Typically, an ARM’s rate will remain fixed for five to seven years. After that, it enters its adjustable period in which the interest rate can rise or fall, often once a year. How the rate
ARMs require careful budgeting: You need to make sure you can afford the higher monthly payment that may occur once your ARM enters its adjustable period.
The benefit of an ARM is that it comes with an initial interest rate that is usually lower than what you’d get with a fixed-rate mortgage, saving you money during this set period. Many buyers who take out ARMs plan to sell their homes or refinance their loans before the loan enters its adjustable-rate phase.
FHA loans
Loans not insured by a government agency are known as conventional mortgages. But you can also choose from several government-insured loan types, including FHA, VA and USDA loans.
FHA loans, insured by the Federal Housing Administration, are especially good for borrowers with lower credit scores. You can qualify for an FHA loan that requires a down payment of 3.5% of your home’s purchase price with a FICO credit score of just 580. You can qualify for an FHA loan that requires a 10% down payment if your FICO score is at least 500.
VA loans
Insured by the U.S. Department of Veterans Affairs, VA loans are available to veterans and current members of the U.S. Military, Reserves, National Guard, Coast Guard, and other agencies. They are also available to some widows of Military members who died while serving their country or from injuries stemming from their service.
The big plus here? VA loans require no down payment, making them perfect for borrowers without a lot of extra cash.
USDA loans
Insured by the U.S. Department of Agriculture, USDA loans encourage buyers to purchase homes in rural areas of the country. Like VA loans, they require no down payment. The only catch? You must purchase a home in a rural area as defined by the USDA.
The bottom line in choosing mortgages is not to make assumptions, but to carefully consider your options.
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