As you look to purchase a new home, it can be intimidating to determine what type of loan you should take out for your mortgage. There are a variety of loan products available, ranging from government-backed mortgages to conventional loans. Each has its own set of advantages and disadvantages. Understanding the different types of home loans can help you select the best product for your needs.
Government-Backed Home Loans
Government-backed home loans include FHA, VA, USDA, and HUD loans. These loans are designed to provide easier access to homeownership than traditionally offered by banks.
FHA Loans – Federal Housing Administration (FHA) loans are funded by the government, but loaned through participating lenders. FHA loans have competitive rates, and these loans are often used with a low down payment. They often require a minimum credit score of 580 or higher, though the bar varies by lender.
VA Loans – Guaranteed by the Department of Veterans Affairs, VA loans are available to make buying a home easier for current and former service members. VA loans have competitive interest rates and offer a no-down payment option for qualified borrowers.
USDA Loans – USDA loans are designed for people in rural communities who may not have access to traditional financial resources. These loans are insured by the Department of Agriculture and provide competitive rates for rural homeowners.
HUD Loans – HUD loans are federally insured programs administered by the Department of Housing and Urban Development. Named after the agency, these loans are offered through HUD-approved lenders, and may offer financing with a low minimum down payment for certain borrowers.
Conventional Home Loans
Conventional mortgages are not federally-backed and are owned by Financial Institutions. These loans are less likely to have the same terms and flexibility as government-backed loans.
Fixed-Rate Conventional Loans – Fixed-Rate Conventional loans provide a fixed mortgage rate over the life of the loan. These loans are ideal for those who intend to keep their home and stay Nlenders. These loans typically require larger down payments known over a longer period of time, making them attractive to those looking to build equity.
Adjustable-Rate Mortgages (ARMs) – Also known as variable-rate mortgages, ARMs are loans with an interest rate that may change over time. ARMs are ideal for those looking for lower monthly payments, although the interest rate can change over time. Be sure to read the terms of your ARM loan carefully, as some loans may have caps on how much the rate can change.
Specialty Home Loans
These loan types vary widely and have unique terms compared to traditional loans.
Jumbo Loans – A jumbo loan is a conventional mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans are typically used for more expensive or luxury homes. Because these loans are more risky for lenders, they often come with higher rates and require a more significant down payment.
Conforming loans – Conforming loans are those that meet loan limits set by Freddie Mac and Fannie Mae, generally up to $484,350. These loans are generally less expensive than other loan types and are government-backed.
Bridge Loans – A bridge loan is a short-term loan used to cover the cost of buying a new home before selling the current one. They can provide quick access to the funds necessary to proceed with a new home purchase, but they often come with higher rates and are not ideal for long-term financing.
Interest-Only Loans – An interest-only loan allows the borrower to make smaller payments for a certain period of time. During this time, only the interest is paid, while the principal remains intact. These loans may have lower monthly payments initially, but they can end up costing more in the long run.
When looking to purchase a new home, it is important to consider the various types of loan products available. Understanding the different types of home loans can help you determine which option will best suit your budget and long-term needs.