When it comes to buying a home, there are no shortages of mortgages options available to home buyers. Before you shop around for the best deal, you should know the primary types of mortgages available.
A fixed-rate mortgage is a conventional home loan that carries the same interest rate and the same monthly mortgage payments for the life of the loan. Fixed-rate mortgages come in 10-year to 40-year terms, but most borrowers opt for either a 15-year or the 30-year term. Fixed-rate mortgages are typically a wise choice for those planning to live in a particular home for many years. The predictable payments allow for easier household budgeting since you always know what you will owe. Fixed-rate mortgages are generally only available to those with healthy credit scores, such as in the 700 to the 720 range. These mortgages are quite often 80/20 loans, which means that you have to put a 20% down payment on your home.
An adjustable-rate mortgage, or ARM, offers interest rates and monthly mortgage payments that vary over the loan`s term. This conventional loan normally comes with an interest rate cap to protect homeowners from suddenly having to make huge monthly mortgage payments. Benefits of choosing an adjustable-rate mortgage include the low initial interest rates. The rates are lower at first because you assume the risk that the rates will change later on in the term. The low initial interest rates are often desirable to borrowers who plan to live in the house for only about five years before moving on. You can also usually nab an adjustable-rate mortgage even if you have a sub-prime credit score or need to finance more than 80% of the new house. The bad news is that your monthly benefits of choosing an adjustable-rate mortgage include the low initial interest rates. The rates are lower at first because you assume the risk that the rates will change later on in the term. Also the bad news is that your monthly mortgage payments can hike up significantly based on market conditions. It`s also harder to budget your monthly payments because the amount varies.
A balloon mortgage is a short-term loan that typically lasts 5, 7 or 10 years. This loan comes with low interest rates, but you only pay off a small portion of what you borrowed during the life of the mortgage. As the end of the term draws near, you will also have to pay back the remaining balance in one lump sum or try to refinance your home. Balloon mortgages are often ideal for those who plan to refinance or sell their homes within 5 to 7 years. Many financial institutions don`t offer this type of home loan anymore, however.
FHA, VA and USDA mortgages are all home loans insured by the United States Government. FHA loans are issued by the U.S. Federal Housing Administration and are open to any qualified borrowers regardless of credit scores. FHA loans are the most commonly issued government-backed loans. These mortgages only require a small down payment, such as 3 to 5% but do come with a maximum loan amount. You must also pay a premium for government mortgage insurance. VA loans are offered to eligible veterans by the Department of Veteran Affairs. VA loans require a 15-year or 30-year fixed interest rate. VA loans also typically finance the entire home purchase, which means that you won`t need a down payment. The maximum loan amount you can get is $203,000. Veterans must also obtain an eligibility certificate from the Department of Veteran Affairs. USDA loans offer low interest rates and no down payment to home buyers who live in rural areas and have low to moderate incomes. USDA loans do require a credit check, but the flexible guidelines allow potential borrowers with a poor credit history to still qualify for a mortgage. The one big disadvantage to getting a USDA loan is that the program is only available in limited geographic areas. In addition, every one of these loans must first be approved by the USDA, which adds time to the underwriting process. Before you decide on which type of mortgage is right for you, consider how long you plan to stay in the home, the amount you have saved up for a down payment and your credit score. Once you have some idea of which mortgage suits your needs, use the free mortgage calculators available at http://www.simplyfinance.co.uk/ to find the mortgages with payments that suit your wallet.