Buying a house can seem financially overwhelming and for some near impossible, especially if it’s your first time. Unless you were one of the lucky early bitcoin investors or became an overnight Tik Tok sensation, these days most first-time homebuyers will need to apply for a home loan, otherwise known as a mortgage. This is when the bank or some sort of financial institution lends you funds to buy a property that must be paid back at a certain interest rate over a specified period of time. However, there are many different types of loans out there that all serve different purposes so it’s important to know how to choose the right one for you. Ideally, your perfect loan will help you save tons in interest fees, your monthly payment costs, and maybe even the initial down payment.
What’s Your Plan
Before deciding on which loan to apply for, assess your situation and consider all your variables. Where do you plan on living and how long do you plan on living there? Do you expect your family to grow while residing there and possibly renovating the property to suit those changes? Do you have enough job security that you can accurately predict the nature of your income? Also, consider economic and environmental factors at play. Once you understand your specific needs, you’re ready to research the different types of loans available.
The most common type of mortgage is a fixed-rate loan. It is a conventional mortgage, meaning it’s not backed by the federal government, that offers a single interest rate and monthly payment for the entire duration of the loan which is anywhere from 15-30 years. This is a good option for those who prefer predictability and plan on staying in their residence for most of the life of their loan.
Then, of course, you have the adjustable-rate mortgages, which as the name suggests, means interest rates are not fixed and therefore susceptible to change depending on the times. The allure here is that the mortgage interest rates will typically be lower than that of the fixed-rate loans but only initially. After 5-10 years, the interest rate will then reflect those of current times affecting your monthly payments as well. So this option is best suited for those who don’t have the right credit scores to qualify for a fixed-rate loan and/or those planning to leave before their rates start to become unpredictable.
Then there are the government-backed loans. Federal Housing Administration, or FHA loans, are the most common type of government-funded mortgage. These loans are very attractive to those who qualify because you only have to put down as little as 3.5% of the loan. As opposed to 20% of the down payment being required for most typical home loans. FHA loans are a type of fixed-rate mortgage so this is a good option for those who don’t have a lot of savings and plan on staying in the same place for a while. However, the loans do have a maximum limit and require you to purchase homeowners insurance upfront or over the lifespan of the loan anywhere from 15-20 years.
The next type of government-backed loan is for those who have served in some branch of the military. A VA loan, or Veterans Affairs loan, is a great alternative to the other options since you can get a home without having to put a down payment or purchase mortgage insurance. Besides the obvious requirement of having to have served in the armed forces, there are some specifics to it as far as qualifications go. Only those who have served for a minimum of six years in the reserves, 180 consecutive days during peacetime, or 90 consecutive days during wartime are eligible for this loan. Further restrictions involve what type of property you can get and the current condition of the residence.
Rural Development Loans
Another type of mortgage that is government-funded is the USDA Rural Development loan. This one is designed for those with a family that lives outside bigger cities in more underdeveloped rural parts of town in which the government finances 100% of the mortgage as well as discounted interest rates. This is great for those with financial struggles, however, you are required to have homeowners insurance and enough income to cover the debt incurred by taking the loan.
Lastly, there is something called a bridge loan; also known as a gap loan because as the name implies, this loan closes the gap between a current home loan and a future home loan. This is for those who are trying to buy a house before their current house has sold. Both loans will be combined into one. This option is available for those who have a good credit score and an especially low debt-to-income ratio. A certain amount of capital based on the combined value of the two homes is also a requirement.
In summary, to find the best home loan for you, assess your situation honestly by getting familiar with your principle, duration, and interest. Also, keep in mind that interest charges on home loans are tax-deductible and you can claim them as an expense on your taxes!