Probably, the biggest purchase you make in your life will be that of a house. And choosing the best type of mortgage is one of the most important decisions you will make during the purchase process. With so many different options in the market, it can be difficult to find a reasonable mortgage that fits your financial goals.
Then, two essential decisions you will have to make when choosing a loan.
Type of mortgage: Conventional or supported by the Government
In the United States, there are two types of mortgages: conventional loans guaranteed by a private lender or banking institution and loans backed by the government.
Most of the loans backed by the government come in three forms:
-The loans of the Federal Housing Administration (FHA loans) were established to make mortgages more reasonable, especially for buyers who purchase their first home. They allow initial payments as low as 3.5% of the sales price.
-The VA loans, which are guaranteed by the Department of Veterans Affairs, are designed to benefit current military service members, veterans and some surviving spouses. They offer competitive mortgage rates and in many cases are available without down payment.
-The Rural Housing Loans are supported by the Department of Agriculture and are intended for buyers who are residents of rural areas and who meet certain income requirements.
These three programs have low initial payment requirements, and it is easier to qualify for a government-backed mortgage than a conventional loan.
On the other hand, there are private entities such as banks, credit associations, private lenders or savings institutions that offer and support conventional loans. The person who needs the loan, or the borrower, would need to have a good credit history to qualify. This is because the loans are not guaranteed by an external source - so the possibility of default by the borrower represents a greater risk for the lenders.
Conventional loans have terms of 10, 15, 20 or 30 years. They also require larger initial payments than those of government-backed loans. Borrowers are expected to pay at least 5%, but this amount may vary based on the lender and the credit history of the borrower.
If you do not have money saved for the down payment but have a solid credit and stable income, a government-backed loan may be the best option for you. Remember that if you choose a conventional loan or one backed by the government, and pay less than 20% of the initial payment, you will also have to pay mortgage insurance.
Interest rate: Fixed or adjustable
Once you choose your loan, you will decide if you want a fixed or adjustable interest rate. Your choice determines the interest you will be charged.
The fixed interest rate on a loan never changes. If you expect to stay in your job at present, have a family that is growing and is willing to take root in a site, a fixed rate loan of 15 to 30 years may be your best option. With this option you will always know what the monthly payment amount of your mortgage is.
It is worth noting that other charges may be added to your monthly mortgage, such as annual property taxes or owner association fees. This, over time, can change the amount of these payments.
Loans with adjustable rates (or ARM mortgages) have interest rates that are readjusted at specific intervals. Typically, these start with lower interest rates than those with fixed rate loans. However, that initial rate only lasts a set period. After the initial term ends, the interest rate - and your monthly payment - rises or falls annually based on the interest rate index.
Often these are more attractive to younger and more mobile buyers who plan to stay in their homes for a few years or refinance when the initial rate is about to expire. Paying lower interest rates in those early years can save you hundreds of dollars each month that can be used for other needs.
Tips
All of these options may seem overwhelming at first. But remember that the type of loan you will end up receiving will depend greatly on your credit history, income and overall financial objectives. Before you start looking for a mortgage, fully evaluate your finances and try to improve your credit history as much as possible.
If you need help, contact a lender or mortgage broker in your area to help you make calculations and explore your options.
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