Mortgage Options for Buyers
With the variety of mortgage options available for home buyers, the entire process can seem intimidating. Listed in this article are the basic loan types an average homeowner may encounter in the mortgage process.
Conventional loans are loans that the US government does not insure and they follow the guidelines set forth by Fannie Mae or the Federal National Mortgage Association and Freddie Mac, Federal Home Loan Mortgage Corporation.
Fixed Rate Loan
The principle amount and interest rate on a fixed loan will stay the same throughout the entire term of the loan. Even if interest rates rise or fall, a fixed rate mortgage will always remain the same. This type of loan works well for buyers who plan on living in a home long-term. Since the principle and interest will always remain the same month after month, the mortgage payment amount will be consistent. This makes it a good option for people who are on a budget and prefer a predictable payment every month.
Qualifications: Fixed rate loans generally require a large down-payment and high credit score.
Fixed-Period Adjustable Rate Mortgages
For these type of mortgages, buyers start off with an introductory period (a specified number of years) where the interest rate will be fixed. After that period is over the interest rate is then adjustable and will vary depending on interest rates in the economy. The number of times the interest rate goes up will also vary, for example, the interest rate may only go up once a year.
The mortgage payment on this type of loan is far less predictable (after the introductory period expires) then the fixed rate loan because interest rates will always fluctuate your payment. Fixed-Period Adjustable Mortgages are good for buyers who will be living in a home shorter than the amount of time on the introductory period. They are also good for people who may want a lower interest rate in the early part of their mortgage loan term. Interest rates for fixed-rate loans are higher than the interest rate in the introductory period of fixed-rate adjustable loans.
Qualifications: Fixed-rate adjustable loans require a large down-payment and higher credit score.
These type of loans are backed and guaranteed by the US Government. They are generally designed for lower to moderate income families with limited funds for down payments. Fixed and adjustable rate options are available for FHA loans as well. These loans tend to have more paperwork involved and have a limit on the loan amount. FHA loans also have less strict qualifications for applicants. These loans are commonly applied for by first-time home buyers. If you’re a first time home buyer, take a look at these top mistakes to avoid!
Qualifications: FHA loans require lower down payments and are more flexible with credit scores.
VA loans were created to give U.S Army members and their families the ability to buy a home with limited funds. These loans have lower down payments and lower interest rates. Another perk for VA loans is that the borrower does not have to pay for private mortgage insurance (PMI). These loans are backed by the U.S. Department of Veterans Affairs.
Qualifications: Active or retired member of the U.S. armed forces. Spouses and surviving spouses of U.S. armed forces are also included.
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