For many people, buying a home would never be possible without taking a loan from banks or lenders. This doesn’t imply that taking a loan to buy a home is a bad thing. In fact, even multimillionaires use loans to finance a number of investments and properties. If you don’t have the entire purchase price of a home, taking a home loan is always a good move.
But which types of home loans are suited for you? Well, how long you plan to repay the loan, where you live, and other variables can make some home loans better suited to your situation than others.
Here are 3 types if loans to consider when buying a home:
1. Fixed-Rate Loans
This is one of the most common types of home loans and often prescribes one interest rate for the entire life of the loan, which is typically 15-30 years. This type of loan is suitable for people who are not planning to move anytime soon and who prefer to have some kind of predictability in re-payment requirements. You only need to pay a given amount for the agreed number of years and that’s it! The fall or rise of your state’s interest rates doesn’t change the terms of the loan, so you will always know what to pay every month.
2. Adjustable-Rate Mortgage (ARM) Loans
Compared to fixed-rate loans and other mortgage loan types, adjustable-rate mortgage loan offers lower interests for a period of time like 5 or 10 years. After the agreed period, the interest rates (and payments) may be adjusted depending on the current interest rates. So, if the national interest rates increase, so will your monthly payments; and if they plunge, the amount you are required to pay will also reduce.
ARM loans are suited for people with low credit scores. Considering that people with poor credit scores may not get favorable rates of fixed-rate loans, ARM loans can lower the interests rates down enough to make your dream of owning a home valid. ARM loans are also recommended for people who are planning to move and sell their homes before the aforementioned fixed-rate period is up (i.e before the interest rates begin vacillating).
3. Federal Housing Administration Loans
Compared to typical loans which require up to 20 percent of the home’s price as down payment, with Federal Housing Administration (FHA) loans, you need to put down as low as 3.5 percent.
Due to the low down payment requirements, FHA loans are preferred by first home buyers who have less savings and lower credit scores. Another benefit of these types of loans is the fact that the down payment can be a gift from a friend or family. There are also a wide range of first-time down payment assistance programs and grants that you may be eligible for.
However, these loans have a few caveats. To begin with, they are limited to certain amounts ($417,000, for instance) and don’t offer much flexibility. Rates are also fixed and you may be forced to pay mortgage insurance—upfront or over the repayment period.
Getting a home loan gives a great opportunity to get a few steps closer to your dream of owning a home. Hopefully, the above guide will help you make the right choice. Remember to also use a mortgage calculator to get a rough idea of the interest rate of the loan type you want to opt for.