Going to buy your first house is a big step and you won’t want to go head-first into this huge investment without knowing how you’re going to afford it. First time homebuyers will associate their purchase with a mortgage, and they’re not wrong, but there’s more than one type of mortgage you can get. Borrowers get ready, because there’s nothing better than being prepared, especially when it comes to making what will perhaps be the biggest investment you’ll make.
30-Year Fixed-Rate Mortgage
First on the menu of mortgages is the most popular choice: a 30-year, fixed-rate mortgage. Houses aren’t cheap, and borrowers want to find the best deal they can get their hands on when making such a big buy. With a 30-year fixed-rate mortgage, borrowers can rest easy knowing that the overwhelming loan amount is spread out over a 30-year timeframe, crunching their costs into manageable monthly repayments. Their interest rate won’t change either because of the fixed rate they’re getting, so borrowers can budget and plan without fear of interest rates increasing and wreaking havoc on their finances.
15-Year Fixed-Rate Mortgage
If you have the desire to pay your home off in less than 30 years, then a 15-year mortgage could be for you. With the dramatic term change comes a higher monthly payment, then a 15-year fixed-rate mortgage with higher monthly repayments might not be a bad idea.
You’ll pay off your home faster and similar to the 30-year fixed-rate mortgage, you’ll also be getting a fixed rate. Even with higher repayments, that interest rate won’t change over the loan’s lifetime. You can plan and budget accordingly without worrying about the interest rate affecting your repayments over the 15-year term.
You might’ve heard of an FHA loan, which stands for the Federal Housing Administration. These loans are backed by the government and exist to help out lower-income borrowers buy homes as well as borrowers who happen to have bad credit. FHA loans allow smaller down payments, so instead of the standard 20%, a borrower can put a down payment as low as 3.5% on their new home. Borrowers with poor credit can seek out an FHA loan with FICO scores as low as 500. However, to protect lenders mortgage insurance premiums payments are required throughout the loan’s lifetime (which sometimes does add up to be as expensive as a 30-year mortgage loan).
Stemming off FHA loans, the government also offers VA loans - loans backed by the Department of Veterans Affairs. These home loans are available to military service members and veterans. VA loans require no down payment and no mortgage insurance. There is an extra cost in an upfront VA funding fee, but if you’re an active duty service member or a veteran, this is an excellent option to pursue for buying a home.
The government also offers support for rural and suburban property buyers through the U.S. Department of Agriculture. For most of these properties, no down payment is required and rural homebuyers can also seek out the opportunity for home improvement loans and grants.
Streamlined-K Mortgage Loans
Another loan a borrower can obtain through the FHA is the Streamlined-K mortgage loan. This program gives funding with the intent of the borrower fixing up the home, rolling the funds into one lump amount. It’s not a difficult loan to qualify for and the paperwork isn’t terribly demanding as with some other government loans.
What’s an interest-only mortgage type? As its name suggests, an interest-only mortgage requires that the borrower only pay on the lender’s interest charges. If you have an interest-only mortgage, your loan’s balance isn’t reduced while you’re making interest-only payments during this period. It seems absurd to only pay the interest, but the borrower benefits in this type of mortgage if they’re not going to be living in the house for very long or a first-time homebuyer.
This type of mortgage doesn’t require that you pay an interest-only payment, but rather it gives you the option to pay a lower payment in the early years of your loan. If you have a fluctuating income because you’re a freelancer or on commission, you could benefit from an interest-only mortgage.
Do you plan on only being in your new home for a short period of time? Do you predict that interest rates are headed towards a decrease? If you’ve answered “yes” to both questions, then consider an adjustable-rate mortgage. An adjustable-rate mortgage typically comes as a home loan with an initial rate that’s fixed for a certain length of time, then adjusts afterward.
A 5/1 ARM means that you’ll have a fixed interest rate for your first five years, then after that term is up, the interest rate adjusts annually. Initial rates offered with adjustable-rate mortgages are usually lower than other loan options. You can choose the term length that locks in your initial rate. Standard lengths include one, five, seven or ten years.
If you’re caught between homes, then a bridge loan could be your ideal mortgage option. For homeowners buying a home before they’ve sold their old one, there’s a bridge loan, which allows borrowers to combine old and new mortgage payments into one. Once the previous home is finally sold, the borrower then pays off that old mortgage and refinances.
Bridge loans quite literally bridge the gap between purchases and are appropriate for homeowners with excellent credit as well as a low debt-to-income ratio. This type of loan works best for borrowers who don’t need to finance more than 80% of both of the homes’ combined value. They’re also favored by house-flippers who don’t want to be late to the game of jumping onto their next property project, but still need to sell their current one.
Equity Mortgage Loan
With this loan type, borrowers take out equity loans in exchange for cash. Loans can have interest rates that are adjusted or fixed, or the loans can be in the form of a line of credit where the borrower can draw funds when they need them.
There are a lot of different ways to buy a house. Not to mention all of the combination and hybrid mortgages you can acquire that are based on your needs, where borrowers take out essentially a first and a second mortgage when their down payment is less than 20%. There’s also a mortgage buydown, where borrowers who want to pay a lower interest rate pay fees in this mortgage type.
Whatever mortgage type you end up going with should fit your financial situation, not strain it. It sure sounds nice to pay off your house in 15 years, but will the higher repayments strap your budget? There’s a reason why a 30-year, fixed-rate mortgage is the most popular. Financially, it gives borrowers room to breathe, but we’re not all the same, which is why it’s critical to learn about all of the mortgage types.