Every year, tens of thousands of people wonder how to get the best home loan. Most people agree that a home loan is one of the biggest investments the average person will make in their lifetime. Getting the wrong home loan can be expensive, and if payments aren't made on time, it can even lead to foreclosure. The first step in finding the best home loan is to know what the different kinds of home loans are.
Most home loans fall into seven main categories. There are some unique hybrid loans that can be worked out, but most home loans fall into one of these three categories:
The conventional mortgage is a loan with a fixed interest rate and a term of 15, 20, or 30 years from a commercial lender. Most of the time, a bank or a mortgage lender will be the commercial lender. The home loan contract locks in the amount of the monthly payments, the interest rate, and the terms of the loan. Private mortgage insurance, or PMI, is needed for these loans if the buyer doesn't have at least 20% for a down payment.
ARM, or Adjustable Rate Mortgage, is a type of mortgage that has a rate that changes over time. The interest rate is what changes in an ARM. The interest rate on a fixed-rate loan won't change, but the rate on an adjustable-rate loan (ARM) will. ARM mortgages can go up or down based on what the contract says. After the first term, the interest rate will change every so often based on how the financial markets are doing.
It's important to know that ARM contracts can be very different from one another. You should definitely check to see if the contract limits how much interest can be charged. If a contract doesn't have a cap, bad things could happen.
Federal Housing Authority Loan, or FHA: The Federal Housing Authority (FHA) does not lend money directly to buyers. Instead, it makes sure that lenders can make loans. Because the FHA programmes back the loan, lenders can give out bigger loans with smaller down payments. The FHA will back up different amounts in different places, so make sure you read the right criteria to find out what you can get.
VA Loans, also called Veteran Affairs Loans, are backed by the Department of Veterans Affairs for qualified veterans and service members. What makes these loans so special is that the buyer, who qualifies for them, can pay little or no down payment. There are some rules, and the VA mortgage fee, which depends on the size of the down payment, applies to these loans. For a first-time buyer, the VA mortgage funding fee is usually equal to 2% of the loan amount. Vets who are disabled may not have to pay the VA funding fee.
The Assumable Mortgage: With these kinds of home loans, you just take over the mortgage that is already on the house. Most FHA, VA, and ARM mortgages can be taken over by someone else. In general, you take over the current contract, which means you are responsible for the remaining payments, interest rates, and term. If there is a difference in equity, it is covered by the down payment. Mortgages that can be taken over must either qualify or not qualify.
The "Buy-Down" mortgage is a type of home loan where the interest is paid first. Over a certain amount of time, these interest payments are made. This makes it possible to pay less each month during the time period of the buy down.
The Hybrid ARM Loans: This is usually a 30-year loan that is the same as a regular ARM loan except that the interest rate changes once during the term. Most of the time, the first rate change comes after 1, 5, 7, or 10 years.
