Home Loan Basics
For first-time or veteran homebuyers alike, the wide array of available home financing options can be overwhelming. Which one is right for you? First, take a look at your own finances and decide how much home you can actually afford. Then, do some research on loan basics, and you’ll have the right tools to find the mortgage that best suits your needs.
In January 2014, new federal lending regulations designed to protect consumers from high risk, debt-trap loans began. The Qualified Mortgage (QM) rule prohibits high risk features and products, such as interest-only mortgages, that were common during the housing boom. Setting new standards for lending in the U.S., the rule is intended to protect borrowers and prevent homeowners from taking on mortgages they cannot realistically afford.
Types of Loans
There are several kinds of mortgage loans, which vary by the loan structure and the agencies that secure them. Primary choices include:
Fixed-Rate Mortgage Loans
Fixed rate loans are the most popular type of loan among homebuyers because they provide the most stability and predictability over time. With this type of loan, the interest rate and the monthly payments stay the same for the entire term, usually 15 or 30 years.
The benefit is that there are no surprises; buyers always know what their interest rate and monthly payment will be. The trade-off is that the interest rate is typically higher than an adjustable loan.
Adjustable-Rate Mortgage Loans An adjustable-rate mortgage (ARM) loan has an interest rate that changes or adjusts over time. This type of loan generally has a lower interest rate than a fixed rate loan, which is its chief attraction. However, these loans change over time and their interest rates often become substantially higher than the fixed rates available at the time of inception of the ARM. Though the rates may increase significantly, buyers will know the most their interest rate can change at any given adjustment and the highest and the lowest their rates can be during the life of the loan. ARMs are popular among borrowers who only plan to have the loan a few years and then sell or refinance their homes.
Conventional Home Loans
Conventional loans are fixed-rate mortgages that are not insured or guaranteed by the federal government. When a buyer puts less than 20 percent down, conventional loans are generally insured by a private mortgage insurance (PMI) company. Qualification standards are typically stricter on these types of loans and require stringent criteria such as a set down payment, certain credit score and income as compared to government-backed loans.
FHA Home Loans
One of the most popular loans, particularly among first-time buyers, FHA loans are provided by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development. These loans have lower down payment requirements and are easier to qualify for than conventional loans. There are different FHA options available from fixed term and fixed interest rate loans to adjustable-rate mortgages.
VA Home Loans
Another example of a government-backed mortgage program, VA loans are guaranteed by the U.S. Department of Veteran Affairs. The VA does not make the loans, but guarantees loans made by qualified lenders. VA loans allow veterans and active military personnel to obtain home loans with favorable terms. In particular, these loans offer 100 percent financing so qualified borrowers can finance 100 percent of the purchase with no down payment, a unique advantage.
What’s Right for You?
In general, borrowers who plan to stay in their home for a long time might want to consider a fixed-rate mortgage. Borrowers on a much shorter timeframe, say a few years, may want to use an ARM loan. Prospective homeowners with limited funds for a down payment might choose the FHA loan program due to its lower requirements. And, military personnel and veterans who qualify may want to take advantage of a VA loan.
For more information about new home financing options, start with our New Home Specialists.