When purchasing a home, borrowers have several different mortgage types to choose from. Deciding which one is best suited to your individual needs and goals can be tricky.
Each mortgage type offers its own set of advantages and drawbacks. Research the features that each offers so that you can decide which option is best suited to your individual needs.
Fixed Rate Mortgage
A fixed rate mortgage is a type of home loan with an interest rate that remains constant over the loan’s lifespan. It’s popular because it provides borrowers with peace of mind and stability in their payments, even during times when interest rates may change.
Fixed-rate mortgages offer more stability than adjustable rate mortgages, as their interest rate isn’t tied to an index or any particular location. This makes it simpler for you to project what your monthly payments will be over the course of a loan and helps you plan accordingly.
Fixed rate mortgages typically have terms of 15 or 30 years, but you have the option to select a shorter duration if desired. While these shorter-term options usually carry higher monthly payments, they help build equity quickly in your home and reduce overall interest expenses.
A fixed rate mortgage offers the major benefit of security, knowing your loan will be paid off at the end of its term. This assurance can be especially useful in low interest rate environments when a fixed rate mortgage can save you money in the long run.
If you need to know your monthly payment on a fixed-rate mortgage, a mortgage calculator can help determine how much it will be. This tool takes into account your current interest rate, loan term and compounding rules in your country.
Once you have all this information, you can compare different fixed-rate mortgages to find one that best meets your needs. Additionally, speaking to a mortgage broker or credit union representative may give you more insight into your available options.
Another advantage of a fixed-rate mortgage is that you can usually lock in your interest rate for an agreed upon period, usually two to five years at a time. This comes in handy when looking to move or make major purchases such as buying a property.
Fixed-rate mortgages can be an attractive option for borrowers with poor credit, as conventional loans require at least 620 credit score and debt-to-income ratio of no higher than 43 percent. There are other requirements for taking out a conventional fixed rate mortgage, such as income verification and using an underlying asset to secure it.
Adjustable Rate Mortgage
As a home buyer, you have several mortgage options to choose from, such as fixed rate or adjustable rate mortgage (ARM). Which loan is best for you depends on your financial situation and timeline. If stability is key for you, fixed-rate mortgages may be your best bet.
Arms typically offer lower initial interest rates than fixed-rate loans, but those rates can rise after the introductory period has ended. Fortunately, many ARMs include caps to prevent your interest rate from rising too rapidly; however, even these limits cannot guarantee that your monthly payment will remain affordable in the long run.
An ARM works by linking your loan interest rate to an index that changes periodically. This index could be a government-reported prime lending rate or another number agreed upon by lenders. Your loan paperwork identifies which index you’re tied to, and lenders have the option of setting your rate based on either that index plus margin or just on the index itself.
Borrowers can take advantage of an ARM to pay off their mortgage early without incurring a penalty, helping reduce the overall cost. They could also use an ARM to refinance their current mortgage and take advantage of lower rates.
Aside from a lower initial interest rate, ARMs offer homeowners greater flexibility. You can make smaller payments more frequently or pay off the loan early if you have extra money available.
However, ARMs can be risky investments. Therefore, they aren’t recommended for people who plan to reside in their homes for decades and they could even prove detrimental if you purchase a house with the intent of selling it quickly.
Before applying for an ARM loan, be sure to thoroughly read through its details so you understand what’s involved and if it’s suitable for you. And don’t be afraid to ask any questions of your lender!
Adjustable-rate mortgages (ARMs) are one of the most popular home loan types, yet they can be complex to comprehend. Their fluctuating nature may seem confusing if you’re unfamiliar with them; fortunately, there are plenty of resources available to assist in understanding this process and deciding which type is right for you.
FHA Loan
When comparing different mortgage types, it’s essential to comprehend what each loan provides. This includes rates, costs and other charges. You can use a loan calculator to estimate your monthly payment as well.
One of the most popular mortgages is an FHA loan. This government-backed option enables first-time and repeat homebuyers with credit bumps to qualify for loans with lower down payments, lower minimum credit scores and higher debt-to-income ratios. While its easier qualifying requirements make it a popular choice among low-income buyers, there are some drawbacks to consider.
The Federal Housing Administration (FHA) requires borrowers to purchase private mortgage insurance (PMI). This protects lenders in case of default by the borrower. The cost of PMI depends on your income, loan amount and term length. You can reduce your payments by making a larger down payment, choosing a shorter loan term or choosing a more flexible type of mortgage.
Borrowers must prove their income through two years of tax returns, pay stubs and W-2s. Additionally, they can submit bank statements, retirement account balances or other evidence of financial stability.
Lenders may request a letter of explanation and documentation to erase your CAIVRS report if you have defaulted on any federal debt, such as student loans or government-backed loans. Additionally, make sure to have a copy of any recent IRS Form 1099-MISC or federal tax return that shows evidence of employment.
To get the best home loan rate and conditions from an FHA-approved lender, it’s best to shop around. These lenders range from large banks and credit unions to community banks and independent mortgage firms, all offering competitive terms and conditions.
Finding an FHA-approved lender is as easy as filling out an online application or calling your local mortgage broker. Some lenders have dedicated teams for FHA loans, so be sure to ask questions so you’re working with the right team for your situation.
You can use the Bankrate affordability calculator to estimate how much you can afford to spend on a house. Before applying for FHA financing, be sure to gather all your financial documents, including an overview of all assets and income.
VA Loan
When purchasing a home, there are various mortgage types to choose from. Some are better suited for certain scenarios than others; for instance, VA loans can be an attractive option for borrowers who wish to purchase without making a down payment.
Veterans and service members find the VA program to be an appealing option due to its relaxed credit requirements and absence of private mortgage insurance (PMI).
VA loans offer no-down-payment advantages and tend to have lower interest rates than conventional mortgages. Furthermore, there are no monthly mortgage insurance premiums, saving borrowers hundreds of dollars each month in premiums.
VA loans are guaranteed by the government, giving them a higher level of security than conventional mortgages. This means a VA lender is more likely to grant you the loan you need with better conditions.
To be eligible for a VA loan, you must meet debt-to-income criteria. Generally speaking, your DTI ratio must be at least 41%; however, there are exceptions for those borrowers who have residual income from their job or have been approved by their lender to have lower DTI amounts.
There are limits to what types of properties you can purchase with a VA loan. You cannot use it for vacation homes or investment properties, and are only allowed to buy owner-occupied homes.
One unique benefit of a VA loan is that you can have the seller pay for closing costs such as appraisal and title search fees. These costs can add up to thousands of dollars, so having someone else cover them saves you valuable money in the long run.
Another advantage of a VA loan is its lack of maximum loan amount limits. This means you can borrow up to the value of your home if you have enough credit and residual income, without worrying about exceeding its limit.
If you’re thinking of purchasing a home with a VA loan, make sure to shop around to find the best rate. With Quicken Loans, you can compare options and receive personalized rates from top lenders within minutes.