5 Mortgage Options Homebuyers Should Know
When buying a home, it's important to understand the different types of mortgages available. There are almost as many mortgage options as there are styles of homes on the market, and choosing a mortgage can make or break your long-term real estate experience. Each type has its pros and cons, so it's important to choose the one that best suits your needs. To help you through the process, we'll discuss each type of mortgage in detail so you can make an informed decision when purchasing your home.
A fixed-rate mortgage is just what it sounds like: a loan with a fixed interest rate. Your payments will stay the same for the life of the loan, no matter what happens to interest rates. This type of mortgage can provide stability and peace of mind with a rate that won't change over a long period of time.
Fixed-rate mortgages typically have higher interest rates than the starting rates of other types of loans, but the advantage of the fixed rate is that your rate won't rise like it will with other loans. The most common terms on fixed-rate mortgages are 30, 20, and 15 years, in that order.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a loan with an interest rate that changes over time. The most common type of ARM is a 5/1 ARM, which has a fixed interest rate for the first five years of the loan and then an adjustable interest rate for the next 25 years. Compared to a fixed-rate loan, with an ARM, your payments may be lower in the beginning, but they could increase (or decrease) as interest rates fluctuate. ARMs may be a good option if you're planning to sell your home before the end of the loan term or if you expect interest rates to go down in the future.
Government-Backed Mortgages (FHA, VA, USDA)
If you're a first-time homebuyer, the difficulty in saving for a down payment can be overwhelming. That, along with low credit scores, can de-rail home buying plans. However, you may qualify for a loan that's backed by the government. The most common government-backed mortgages are Federal Housing Administration (FHA) loans, VA loans, and USDA loans.
FHA loans are available to all first-time homebuyers and require a minimum down payment of as little as 3.5%. VA loans are available to eligible veterans and their spouses, and they require no down payment. Buyers in rural areas can look into USDA loans, which require a minimum 3% down payment. If you qualify for a government-backed loan, you'll likely enjoy a lower interest rate and more flexible terms than with financial-institution-backed mortgages.
An interest-only mortgage is a type of loan that allows you to make interest-only payments for a set period of time, usually five to 10 years. At the end of the interest-only period, you'll be required to start making principal and interest payments on the remaining balance of the loan. This type of mortgage can be a good option if you're looking to keep your monthly payments low in the short term, but once the interest-only period has ended, much higher interest-plus-principal payments begin.
A balloon mortgage is a type of loan that requires you to make payments for a set period of time (usually five to seven years) and then pay off the remaining balance in one lump sum. This type of loan keeps your monthly payments low for the immediate future after buying a home, but once the balloon payment is due, you must either pay it off completely or refinance to a fixed-rate or adjustable-rate loan.
Which Home Mortgage is Right For You?
As you can see, there are a variety of ways to secure a mortgage loan for your home purchase. Which route you choose depends on your goals and home buying strategy. Be sure to do your research so you understand the risks and rewards associated with each type of mortgage. Purchasing a home is one of the biggest decisions you can make, and our team of real estate agents is here to guide you all the way from mortgage selection to moving in!