Understanding Home Loan Options
The reason why people tend to get overwhelmed when it comes to home loans is the number of options available. Not all home loads are the same. The concept of a loan is very simple. When you take money from a single lender, you have to pay back the loan over a period of time. Each loan has different down payment and interest. Some have a 30% down payment while others have only 3%.
People assume that less down payment is better. This is not the case. It is all relative. You need to have a good grasp over the different loans and how they work. We have compiled a list of the home loan options you. Once you understand what and how the loans work, you will be able to choose the best one according to your budget and requirements.
4 Types of Home Loan Options
1. Conventional Mortgage
A mortgage that is not backed by the government or a government agency is a conventional mortgage. This loan comes from credit unions, banks and fund conventions. These loans are very flexible. Only borrowers with stable employment, a good credit score and excellent income histories are given the loan. Usually, a down payment of 3% is required.
Two government-sponsored agencies, Freddie Mac and Fannie Mae are the ones that sell and buy conventional mortgages in the USA. These loans need better credit score when compared to the loans given by government agencies. The higher the credit score, the lower the interest rate that you will be asked for.
2. Federal Housing Administration Loan (FHA)
This loan is insured by the FHA, Federal Housing Administration. This means that these loans are backed by the government. This provides a sort of guarantee for lenders. This ensures that the buyers who do not qualify for the conventional loan can get a loan.
A very important thing to understand is that the FHA does not issue loans itself. It just ensures that those mortgage payments are being met. You can get a FHA-insured mortgage through the banks. The premium of the mortgage is the cost of having FHA guarantees the loan. This is a protection and is given to the lender in case the buyer is not able to pay off the loan.
Initially, these loans were intended for people who did not have a good credit score and could not afford the other loans. But now, it is popular with most of the borrowers. These loans have different requirements. Check all to see which one suits you!
3. Adjustable-Rate Mortgage
Generally, the interest rate is fixed for loans. The difference between normal loans and adjustable-rate mortgage loans is that the later come with an interest rate that is variable. Initially, the interest rate is fixed for one or two years. With a while, the interest rate decreases. This is because it is applied on the balance left. It can decrease yearly or even monthly, depending on what sort of deal you have.
These are also called floating mortgages. There are further classifications and types of ARM. They come in the following three forms: hybrid ARM, payment-option ARM and interest only ARM.
4. USDA Home Loan
The Department of Agriculture (US department) also provides loans to people. These loans are specifically for low-income residents. Moreover, they should belong to rural areas. They are unable to get conventional loans and mortgages from banks etc. This is because they don’t have a good credit score. If you belong to rural areas, go ahead and apply for a USDA home loan.
The aim of the USDA home loan is to help people get out of unsafe and unhealthy living conditions. They are encouraged to get homes with greater space and modern utilities. The best thing about it is that they have 0% down payment. You have two options: either a mortgage that is federal guaranteed or a direct loan which the government will provide you with.
Understanding Which Loan Type Is Right For You
Deciding which loan to get for building your house is not an easy task. There are many different loan options which can confuse the common man. Some have a low interest rate which attracts people. Others have a low monthly payment but a higher interest rate. These loan options easily confuse people.
With this guide, we hope that you understand the basic working of the loans. Once you understand what and for whom the loans are, deciding which one to pick can be much easier!