Quick Guide to 7 Different Home Loan Options: Which One Is Best for Your Situation?
If you've ever bought a home or you’re in the process of buying your first home, financing such a sizable investment is probably the most stressful part of the process. There are so many home loan considerations that it’s easy to become confused and worried that you aren’t making the best decision.
The guide below provides an overview of different types of home lending options and the people who typically benefit the most from using them.
Reverse Mortgage
Who benefits most: Older homeowners in retirement who have already paid off their homes and need extra income.
A reverse mortgage is very different from other options listed here. Instead of making monthly payments you receive payments that are drawn out of the equity in your primary residence that’s free of liens. It’s essentially a way for older homeowners to use the equity of their homes to supplement their monthly income, cover medical expenses, or make home improvements. It can also be used to purchase a less expensive home outright without getting another loan. The money received from the reverse mortgage won’t need to be repaid until you move out of your primary residence.
30-Year Fixed Rate Mortgage
Who benefits most: Young buyers who have money saved for a down payment and want the most reliable monthly payment.
A 30-year fixed-rate mortgage is the most common lending option used today. However, you can also opt for 20, 15 or 10-year fixed-rate mortgages, which are popular among mature homeowners who want to pay off their loans in less time. For the shorter loan periods, overall interest rates are lower, but monthly payments are higher. The interest rate for these mortgages stays the same for the life of the loan, which means the payments will always be the same. Another point worth noting is that for the first few years payments will mostly be applied to interest rather than principle.
Adjustable Rate Mortgage (ARM)
Who benefits most: Typically best for young home buyers who need a low payment upfront but will be able to handle higher payments in the future. Also beneficial for people who plan to sell their homes within a few years.
When you opt for an adjustable-rate mortgage the interest rate will fluctuate from one year to the next. The interest rate for the year is based on the value of one-year Treasury bills plus an added margin--this means that payments could go up or down from year to year. People often use ARMs to qualify for homes that might be out of their reach with a fixed-rate loan. Now there are also hybrid adjustable-rate mortgages that have a fixed rate for a certain number of years before being adjusted.
FHA Loan
Who benefits most: Homebuyers who need a low down payment and don’t necessarily have perfect credit.
These loans are insured by the government so that buyers without perfect credit still have a chance to become homeowners. Buyers will need to make a minimum down payment of 3.5 percent. An FHA loan can be used to either buy or refinance a home.
VA Home Loan
Who benefits most: Current and former military members of any age who meet eligibility requirements.
VA home loans are made by private lenders but guaranteed by the U.S. Department of Veteran Affairs. This helps to ensure that qualified individuals get the best interest rate possible and no mortgage insurance premiums are applied. It’s also one of the only loan options that has a 0 percent down payment. However, this type of loan is only available to eligible military members, National Guard members, reservists, and veterans.
Jumbo Loan
Who benefits most: Affluent buyers who need a loan that is much larger than what a conventional mortgage provides.
If you are among the lucky buyers that need and can afford a home loan between $417,000 and $2 million, then a jumbo loan is probably your best option. The maximum amount will vary by location and can be secured with either a fixed rate or ARM mortgage.
Refinance Programs
Who benefits most: Homeowners who already have a home loan but want to take advantage of a lower interest rate to decrease their monthly payments.
Refinancing programs give current homeowners the ability to lower their monthly payments and overall cost of their mortgages by lowering the interest rate on the remaining balance. The term of the loan can also be adjusted to lower the payments. This is a common practice when average interest rates drop as they have in recent years. However, homeowners should note that there will be closing costs and fees associated with refinancing. Before deciding if this is a viable option, homeowners should determine the break-even point to see if the costs are worth it.
