Mortgage 101: The Best Option for Each Buyer
With the start of the new year and interest rates still at historic lows, now may be as good a time as ever to consider purchasing a new home. If you’re considering home buying, you have a decision to make that may be even more important than whether you want a Cape Cod or a colonial; choosing the right type of home loan for your needs could save you money over the life of your loan. Make the best decision for your unique situation by considering the pros and cons of the following mortgage options.
There’s a good reason why fixed-rate mortgages are the most common type of home loan; as the name suggests, buyers don’t risk their monthly payment increasing if interest rates rise. Despite market tumult, buyers with fixed-rate loans will pay the same amount for principal and interest each month for the duration of their loan. Although this loan type offers security that others don’t, interest rates on fixed-rate loans may be slightly higher than those you’d be able to get on an adjustable-rate mortgage.
May be best for: Buyers who plan to be in their home for a number of years or those who favor a predictable payment schedule.
Adjustable-Rate Mortgage (ARM)
Unlike a fixed-rate mortgage, the interest rate of an ARM can fluctuate from year to year. As the loan’s interest rate rises, the monthly payment may rise, as well. Alternatively, if the interest rate dips, the monthly payment will likely follow suit. To protect the buyer, almost all ARMs have minimum and maximum caps that limit how much a rate, and subsequently your monthly payment, can vary from year to year.
May be best for: Buyers who prefer a lower starting interest rate, those who aren’t planning on living in their home for very long or those with poor credit who can’t secure a reasonable interest rate on a fixed-rate loan.
By starting with an initial fixed-rate period and then switching to an adjustable rate, this loan option combines the temporary stability of a fixed-rate mortgage with the often lower interest rate of an ARM. Usually the fixed-rate period of hybrid ARMs varies from 3 to 10 years and then changes to a more traditional ARM.
May be best for: Buyers who want to take advantage of a lower starting interest rate or those who aren’t planning on living in the home for longer than the initial fixed-interest period.
Federal Housing Administration (FHA) Loan
While most conventional loans require a down payment of 20 percent of the purchase price of your home, an FHA loan allows you to put as little as 3.5 percent down. Interest rates for FHA loans are typically fixed, and buyers are required to pay mortgage insurance that often hovers around 1 percent of the loan cost.
May be best for: Buyers with minimal cash available for a down payment or those with less-than-perfect credit scores.
Veterans Administration (VA) Loans
Requiring no down payment and no mortgage insurance, VA loans are often enticing for current and former service members. Conversely, VA loans come with a number of stipulations, including that the home must be the buyer’s primary residence and also must meet “minimum property requirements.”
May be best for: Qualifying veterans who would rather bank their down payment.
Whether you’re considering buying for the first time or the last, choosing the home loan that best suits your lifestyle and financial goals can help you approach closing day with the confidence of knowing you’ve made the right decision.