You may be wondering, "What is the best mortgage to use when I buy my home?" The answer is a two step question. The realm of mortgages can be confusing at first glance, but they fall into some broad categories. All loans will have a choice when it comes to setting their interest rate and all loans are either governmentally insured or traditional.
First, let us consider traditional versus government insured mortgages. The traditional one is fairly straightforward from the bank, but bankers usually require a higher credit score. A home buyer will also need to make a down payment of at least 5 to 10 percent minimum. If you are able to make more than a 20 percent down payment, then you will be able to waive fees for mortgage insurance, which will lower your monthly purchasing costs. On the other hand, if your credit score is around 640 or lower and you do not have enough cash for houses for a normal down payment, you will most likely not qualify for a traditional loan.
In such cases, government insured mortgages may be the answer. Broadly, there are three types of government insured mortgages and of these three, the FHA (Federal Housing Administration) loan is the most popular. FHA loans are given through FHA approved lenders, and their qualifications are flexible for most potential home owners. In some cases, the down payment may be as little as 3.5 percent and home buyers who have poor credit scores may still be able to qualify. For these reasons, more than 30 percent of the mortgage market today is actually comprised of FHA loans. The downside of FHA loans, however, is that they will require purchasing mortgage insurance which will increase a home buyer's monthly costs.
The last two types of governmental loans are VA (Veterans Administration) loans for military service members. VA loans allow for house purchase to be 100 percent financed and is a good choice for military families. The other governmental loan is USDA loans or "farmer loans". These are given out to only low income families living certain geographical locations, mostly rural in nature.
After deciding what group you qualify for, consider how long you plan to live in the home you are choosing. This will determine what interest options to choose. The fixed rate mortgage (FRM) has a fixed interest rate, so for the entire length of the mortgage your monthly cost will be same. You will usually pay more comparatively during the first couple of years in comparison to other mortgage options because your fixed interest rates are usually higher, but you benefit from lower comparative cost nearing the middle and end of your term. Adjustable rate mortgages (ARM) as the name implies have rates that change reflecting market conditions; thus, monthly payments will not be the same each year and generally increase in nature as the interest increases. However, some people opt for ARM loans because the initial years of monthly payments have much lower interest rates than for fixed loan, and they only plan to live in their home a few years anyway before monthly payments dramatically increase. Most ARMS are actually hybrid ARM loans in which the first several years have a fixed rate interest (which is usually lower than a traditional FRM), and then the loan switches to a variable rate interest afterwards. People who choose ARMs and hybrid ARMs either want to save up front, plan to move from their home before mortgage payments increase, or plan to be able to refinance the loan when such a time comes.
For the best information on what type of loan is right for you, speak with a bank lender. They will be able to give you a pre-approval letter reflecting your financing options.
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