Buying a house for the first time can be exciting and nerve-racking at the same time. If financing is your chosen means for buying your first home, there would be several types of housing loans available, but because you’re a beginner, some of them might not be suited for you yet.
Finding the best type of loan can be made easier, thanks to housing loan providers in places Ogden, Utah, for example. But for the meantime, consult this guide to get an overview of each of your options.
Key Components of All Loan Types
Before we dive into your options, let’s go over the two key components present in all types of housing loans: loan term and interest rate.
The loan term is the total amount of time it would take to fully pay the loan. Most banks in the U.S. offer a 30-year loan period, which is 360 monthly payments in total. After 30 years, the principal, which is the amount of money you borrowed, plus the interest rate should be paid in full. That is if you don’t sell the home within the loan term.
Interest rate is the price of the loan. The law mandates interest rates to be presented to the buyer as Annual Percentage Rate (APR). This includes all the other fees and charges from the bank in addition to the interest amount. As a buyer, you’d want to choose a loan type with the lowest possible interest rate. To know the total amount you owe to the creditor, multiply the APR to the principal amount.
Types of Housing Loan
Fixed-rate mortgages are a type of a conventional loan. This would be your simplest financing option. Here, the bank would offer you a specific amount of monthly payment and a single interest rate throughout the life of the loan. The monthly payments and interest rates would remain fixed. The loan term for fixed-rate mortgages is typically 15 or 30 years.
The predictability of this loan is what makes it preferable among many first-time home buyers. You can live comfortably knowing that your debt wouldn’t suddenly have additional fees and that it wouldn’t be affected by the interest rate fluctuations in the market.
Adjustable Rate Mortgage
One advantage of the ARM is the interest rate, which is typically lower than a fixed-rate mortgage’s. However, this rate wouldn’t stay the same after a period of time, 10 years, for example. After 10 years, the interest rate will adjust typically once a year, in correspondence to the current interest rates. In other cases, the interest rates change every two, three, five, or seven years.
This would be a better option if you plan on selling your home while the loan term is still effective. You can move out and sell your home before the interest rate goes up.
The Federal Housing Administration offers a loan perfect for first-timers, in which down payments can be as low as 3.5%. The credit requirements are also less stringent. They’re also fixed-rate mortgages with a 15- or 30-year term. Most FHA loan amounts don’t exceed $417,000.
The FHA would be perfect if you’re a young professional with limited savings. However, you would be required to pay mortgage insurance (around 1% of the loan amount), which you could do in advance or during the life of the loan.
Veterans and service people can qualify for a VA loan. No down payment is required at all, and the terms are mostly favorable. You also won’t be required to pay mortgage insurance.
If you’ve served at least 90 consecutive days in the U.S. military during wartime, 180 days during peacetime, or 6 years in the reserve, you can be qualified for the VA loan. Note, however, that the VA would require you to use the home as your primary residence.
From these four financing options, you’d be sure to find the best one and live in your new home in no time.