For most people, buying a house can seem like the ultimate dream come true. Being able to buy one’s first house requires loads of effort, which is why most homeowners take out a home loan so that they can get the budget to buy a home. With that said, if you are planning to buy your own house, then you might want to get a home loan to buy a house.
Home loans, also known as mortgages, come in different types, which is why you should know how to get the right loan for your situation.
ARM vs. Fixed-Rate Home Loans
With any type of loan, you need to pay interest on the money you borrow, which can be either adjustable or fixed. With a fixed interest rate, you pay a set interest rate on your monthly payments. You will know the set interest rate at the time of signing the contract, and the interest rate will never change throughout the loan term.
On the other hand, adjustable-rate home loans have adjustable interest rates that fluctuate and might rise or fall over the term. Typically, ARMs comprise a lower initial interest rate than fixed-rate mortgages.
15-Year vs. 30-Year Home Loan Terms
When you take your first home buyer loan to buy your house, you are typically given two options regarding the period over which you will pay off the loan while following a payment schedule. Conventionally, home loans have either a fifteen-year term or a thirty-year term. The fifteen-year term comes with a lower interest rate, and you end up paying less over the term. However, the lower interest rate comes with higher monthly installments.
On the other hand, the thirty-year term has relatively lower monthly payments, but it will cost more. The thirty-year mortgage has more purchasing power.
Conventional Home Loans
Usually, there are two types of home loans: conventional home loans and government-backed loans. Conventional loans come in two forms:
Conforming Loans
Now, conforming loans are mortgages that are aligned with the criteria set by the FHFA. Typically, conforming loans can not exceed $766,550 for the typical one-unit properties; however, these loans can also be as large as $1,149,825 for homes in high-cost communities.
With conforming loans, if you pay a down payment that is less than twenty percent of the total value. You will have to pay for a PMI. You might leverage a 3% down payment if you meet the criteria. However, you will have to pay equity until you have 20% equity in the home.
Jumbo Loans
Compared to conforming loans, jumbo loans aren’t backed by the government and also don’t comply with the FHFA. Jumbo loans can exceed the limits of conforming loans, which means that you can buy a more expensive house. However, for a jumbo loan, you will need a high credit score. Also, jumbo loans require larger monthly installments.
Final Thoughts
Choosing the right home loan can be a bit confusing; however, it is important to do your research. The key with any mortgage is to make sure that it suits your budget and needs. The right home loan can help you own a house sooner and help you save money, too.
