By Team Tomorrow
Published August 9, 2021
Unless you’re paying in cash for that $450,000 duplex, you’re going to take out a home loan.
Home loans are almost as diverse as the types of homes themselves, and they all come with their pros and cons. Here are six types of home loans you should know about when you’re looking to buy a home…
Fixed-rate mortgages are most of the most common home loans out there, arguably for two reasons:
A 30-year fixed-rate mortgage is by far the most popular loan for both reasons listed above. If you take out a $250,000 loan at a 3.34% interest rate (today’s current rate for a 30-year), your monthly payments come out to $1,100 for 30 years. As such, you’ll likely enjoy a lower mortgage payment than what you’re paying rent now, and far less than people are likely to pay for the same home in 30 years). Meanwhile, the bank makes $146,145 in total interest off the loan.
Another popular option is the 15-year fixed-rate mortgage. With a 15-year, you’ll pay off the loan in half the time and give the bank much less in interest. That same loan for today’s current 15-year rate: 2.401% will cost you $1,655 in monthly payments. By the end of the term, you’ll only end up paying the bank $47,963 in interest. That’s $98,182 less than you’d pay in interest in a 30-year, and it’s paid off in half the time!
We recommend getting a 15-year if you can. You can also start with a 30-year, then switch to a 15-year when you refinance and get a lower interest rate.
ARMs are more complex and riskier than fixed-rate mortgages. ARM home loans start with a fixed-rate for a set amount of time, then it adjusts periodically. For example, a 7/1 ARM has a fixed-rate for the first seven years, then adjusts annually based on how the interest rates change.
If you don’t plan on having a mortgage for too long, or if you believe the interest rates will decrease in the future, you may want to consider an ARM.
Given how low rates are today, it’s unlikely that’ll be the case.
Three government agencies back mortgages to help Americans become homeowners:
FHA loans are for borrowers who don’t have a large down payment saved up. With an FHA loan, you only need to come up with a 3.5% down payment if you have a FICO score of 580 or above. If your FICO score is between 500-579, you’ll need to put at least 10% down.
Saving 3.5% is much easier to do, but also requires you to pay mortgage insurance premiums. Also, because your down payment is smaller, your mortgage payments will be higher.
VA loans are available to military service members and veterans. They don’t require a down payment, and you don’t have to pay mortgage insurance. There is a funding fee’s charged on VA loans, but it’s usually rolled into the loan itself or paid upfront at closing.
USDA loans are for low-to-moderate income borrowers in rural areas. You must be buying a home in a USDA-eligible area and meet the income requirements to qualify. Some USDA loans don’t require a down payment.
Jumbo loans are for mortgages that exceed federal loan limits, which is $548,250 in most of the US. In certain areas, like Washington D.C., that threshold increases to $822,375.
To get a jumbo loan, you need to have a down payment of at least 10% and a FICO score of at least 660. Most lenders won’t consider a jumbo loan if your FICO score is below 700.
Here are a few other types of home loans and terms you may hear:
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