Homebuyers: Which Type of Home Loan Is Right For You?
If you’re in the market to purchase a new home, you may have seen that there are a variety of home loan types available for a mortgage. Depending on your financial situation and the price of the home, different loans can be best for different buyers.
Below is some information on the different types of home loans out there. Taking this information into consideration can help you decide which home loan works for you.
Fixed-Rate Home Loan
Fixed-rate loans are probably the type of loan you are most familiar with. With this loan the interest rate does not change over time. The terms are usually for 15 or 30 years but can be different lengths as well.
The fixed-rate loan is composed of principal, interest, property taxes and homeowners’ insurance. In a fixed rate loan the principal and interest will always remain the same. But, depending on outside factors, the taxes and insurance may change over time. That would affect the total overall monthly payment.
Future market conditions, employment status and credit score changes have no impact on a fixed-rate mortgage. As long as you are current with payments, your interest rate is fixed no matter what happens. If you choose to refinance, your current loan terms end and you will have to start over with a new loan.
Adjustable Rate Home Loan
Next up is an adjustable rate mortgage, sometimes known as an ARM. This home loan works just as the name suggests: the interest rate changes with market conditions over time. If the benchmark rate goes up, your payments will increase. But if it goes down, your payments will go down as well.
The benchmark and the additional margin added by the lender are the two factors that determine ARM rates. ARM rates are locked for a certain number of months or years where you’ll pay the initial rate.
For as short as 2 months or as long as 5 years you’ll pay the initial rate, then you’ll move on to the adjustment period. The adjustment period can only be raised in increments after a predetermined amount of time. This period can also range from months to years. Then there is the periodic adjustment cap. This is the maximum amount your rate can go up.
Jumbo Home Loan
If you are buying a home and need a mortgage outside of the federally-determined loan limits, you’ll need a jumbo mortgage. Jumbo mortgage minimum amounts are determined based on the county in which the property is located. Counties with typically high housing prices have a higher threshold for a jumbo mortgage. For counties with lower housing prices, the jumbo loan amount is also lower.
You can expect to put down a larger down payment for jumbo mortgage. You may also be required to do more than one appraisal.
Only the amount that needs to be borrowed is what makes a jumbo loan. It doesn’t have anything to do with whether it is a fixed rate or ARM loan.
Take a look at your budget and financial goals and then sit down to determine which home loan is best for you. Always enlist the help of a professional if you have any questions.