Mortgages and Buying Your Home
How to Choose Between Different Types of Loans
As you move towards buying your home you will start to hear a lot about the different home loans and mortgages available. One of the most common is the 30-year fixed-rate mortgage loan. This is perfect for many home buyers but there are other alternatives that you may better meet your needs. For example, if you are looking for a short term loan because you know you will be moving on in a few years there are more cost-effective ways of securing a home loan.
To help you make this key decision we have put together a guide to some of the different types of mortgage loans available.
When You Should Choose a Fixed-Rate Loan
If you are expecting to live in your home for a long time a fixed-rate loan is a good choice. These help you to budget more effectively by keeping the interest rate fixed at the same level for the life of the loan. Many of these mortgages are taken out for between 10 and 30 years and the shorter the term of the loan the more beneficial the interest rates. For example, you will have a lower interest rate on a 10 year fixed rate mortgage than on one that you take out for the full 30 years.
Other factors can influence your repayments with this loan because although the interest rate stays the same you can find that insurance and property tax rates fluctuate. If you start to find that the interest rate falls it can be better to look at refinancing the loan.
When You Should Look at an ARM Loan?
An “Adjustable Rate Mortgage” (ARM) is also known as a “hybrid” loan. With these loans, the interest rates start fixed at the beginning of the mortgage, for example, for the first five years. At this point, the interest rate can then fluctuate according to the market rates. If you are only planning to stay in the property for a few years an ARM would work well for you. Although with ARMs the interest rates can rise after the initial period the rates are often lower than fixed-rate mortgages for the initial part of the loan period so if you know that you’re moving sooner than later this form of property loan would make good financial sense.
Could You Use the HUD Program?
HUD is a housing program which offers homes at huge reductions to professionals including police officers, first responders and teachers. The homes are owned by the government and it will take around 50% off the list price to encourage people to move into specific communities. Take a look at the Good Neighbor Next Door program if you fall into one of the key groups, the only commitment you will make is that you will stay in your new home for a minimum of 36 months.
Jumbo Loans – Are They Your Best Option?
Jumbo loans are perfect for home buyers who are looking at expensive homes in very competitive markets. Areas such as Los Angeles, the Bay Area and New York City are renowned for high property prices so a jumbo loan may be the only option if you need to move to one of these areas.
These loans usually require a large down payment, excellent credit scores and involve more stringent appraisal processes. The lowest jumbo loan is around $424,000, although in some of the pricier markets they can start from as high as 4636,000.
Loans for People with Zero Down Payment
Some buyers find that although they earn enough to buy a home they cannot make the down payment. Luckily the federal government are backing 2 options for home buyers who need a 100% mortgage loan. These are:
- USDA Loans – The United States Department of Agriculture offers loans to some buyers living in rural areas with modest incomes who need to find a home. There are income rules for the scheme and this varies by location.
- VA Loans – The Department of Veterans Affairs offers a zero down-payment loan to ex-military personnel and their families.
The federal backing provided by these schemes means that banks will look more favorably on home buyers with more modest incomes and lower savings.
Loans for People with Small Down Payments
There are options for those looking to buy a home without laying down a large down-payment and these can mean the difference between buying now or having to wait for several years so they are worth looking into if you are wanting to find a home.
Home buyers with down-payments as low as 3% can get loans through Fannie Mae and Freddie Mac, however, to qualify you must have a suitable income and a good credit record. Buying a home in certain areas is also looked upon more favorably. The home buyer is usually required to take out mortgage insurance at least until they own a 20% equity in their home.
Loans for People with Low Credit Ratings
Many people don’t have the perfect credit score but if yours is particularly low you could qualify through a scheme backed by the FHA. The Federal Housing Administration help buyers with credit scores over 580 by linking them to private tenders who ask for low down-payments (Around 3.5%) for buyers on both fixed- and adjustable-rate mortgages.
If your credit score is more than 500 but under 580 you can still qualify under the FHA scheme but will need a larger down payment. All borrowers on the scheme must take out valid mortgage insurances.
On the USDA and VA loan schemes, there is no requirement for any specific credit score.
If You are a Prisoner to Student Debt
If student debt is something you are burdened by this can be a factor when looking to buy a home but, fortunately, there is now some flexibility for borrowers who are still carrying student debt. Some of the loans available through Fannie Mae and Freddie Mac are suitable in this case. They will also work with borrowers to help pay off their debts over time. If you have student debt and you are looking for a home it is worth contacting these providers for more information.
Do You Want to Buy a Fixer-Upper?
Buying a home that needs some renovation is a good way to become a homeowner for the first time. To assist you with this take at look at some mortgage programs offered by the FHA and Fannie Mae.
The FHA asks for a 3% down-payment and the home buyer must hire a specialist to certify that the project is feasible and to oversee the work. Fannie Mae’s Home-Style Renovation mortgage asks for a 5% down-payment and the lenders will also oversee the project. These types of loans are risky so lenders will always charge more interest.