Before you decide to buy a home, you’ll want to know everything possible about your lending options. Unless you’re purchasing a house completely with cash, which most people can’t afford to do, this means you’ll finance the purchase through a home loan or mortgage.
Typically, you’ll want to get pre-approved from a credible lending institution or mortgage broker before you begin your home buying journey, so you know how much you’re qualified to borrow, which ultimately translates into how much you can spend and shows the seller that you’re a serious buyer when you’re ready to make an offer. Mortgages come in all shapes and sizes. From your traditional fixed-rate mortgage to a balloon mortgage, you’ll need to weigh your options carefully to make the best home-buying decision for your financial situation. Here are the different types to consider.
The most common type of home loan is a fixed-rate mortgage. People love a fixed-rate plan because your interest rate stays the same throughout the term of your loan. Typical terms have 15 to 30-year payment plans, which works best for people who want a lower monthly payment that’s predictable over an extended period.
An adjustable-rate mortgage, also known as an ARM loan, uses a low fixed “teaser” rate for a locked-in term of one to 10 years, which is expected to increase over the lifetime of the loan. These mortgages are popular with people who don’t plan to have mortgages for a long time or gamble on interest rates going down in the future.
Buyers who have a large cash flow or high cash savings may want to consider an interest-only mortgage. These payments only require you to pay down the interest, not the principal, during the interest-only payment period. This means that if you get cash bonuses or have a large rising income, you can pay on the interest-only at the beginning, before paying down the interest plus principal in the future. It’s a riskier set up than an ARM or a fixed-rate mortgage, but it can work in your favor if you have substantial assets in the bank.
A balloon mortgage operates similarly to an interest-only mortgage with one major difference. With a balloon mortgage, you only pay on the interest for a fixed period; then the entire loan amount becomes due in one lump sum. The key is to pay the interest for a short amount of time, then pay off the principal with one large check. It’s ideal for folks who can almost pay for a home in cash but need a few extra years to save for the remaining amount.
FHA, Federal Housing Administration, are government-backed loans designed to help lower-income individuals purchase a house. The down payment can be as low as 3.5%, and you’ll need to hold mortgage insurance in order to qualify, but it’s a worthwhile option to begin the path to homeownership. It’s also a good option to consider if you have a lower credit score and can’t afford the standard 20% down payment.
The Department of Veteran Affairs offers accessible home loans to military service members and veterans to help them adjust to civilian life. With a low-interest rate, no required insurance, and no down payment, it’s a huge perk for those that have served.
The last major type of mortgage is the jumbo mortgage. These mortgages come in either fixed-rate or adjustable rates for amounts above conventional loan limits. Essentially, these home loans are reserved for people who are making an expensive home purchase or are looking to refinance a luxury home. You’ll need a credit score of at least 700 and a down payment of over 10% to qualify.