Teasing out the right home loan from the many available options can seem overwhelming. A qualified lender can help, but it’s important to understand the vocabulary. Here are some home loan terms you should know:
When you think of a loan, you probably think of a conventional or conforming loan. An example is the ubiquitous 30-year fixed-rate mortgage. These loans are perfect for buyers with a strong credit history because they are tied more directly to your credit score and down payment. There are several pros to this type of loan:
- If your credit score is high enough, you may not have to put 20 percent down.
- If you choose to put 20 percent down, you won’t need private mortgage insurance (PMI).
- There is usually no upfront mortgage fee.
- Fixed and adjustable-rate mortgages are available.
- You can choose loan terms from 10 to 30 years.
There are some cons:
- If you are approved for a conventional loan with a lower-than-ideal credit history, you may be on the hook for a higher interest rate.
- These loans are not backed by the federal government which means the lender is at more risk. That means the requirements will be more stringent.
A fixed-rate loan means that your mortgage rate stays the same throughout the life of your loan. These loans are available on 10-, 15-, 20-, 30- and 40-year terms, but 15 and 30 terms are the most common. Some things to keep in mind:
- 15-year mortgages come with higher monthly payments but usually have lower interest rates and less total interest compared to longer-term loans.
- 30-year mortgages offer lower monthly payments than 15-year mortgages but at higher interest rates. You also will pay more in interest than you would with a 15-year loan.
The initial rate of these loans is fixed for a period of time. Your rate then adjusts to current market rates. The fixed rates are usually quite low, potentially saving you a bundle. You do risk interest rates rising which will cause your monthly payment to rise, as well.
FHA loans offer prospective homebuyers low down payment requirements, more lenient credit score standards and flexible income guidelines making them an excellent choice for first-time homebuyers. The mortgage is guaranteed by the Federal Housing Administration making them less risky for lenders to offer.
On the pro side:
- You may only need as little as 3 percent of the home price as your down payment.
- Your credit score can be as low as 580 with 3.5 percent down or 500 with 10 percent down.
- 15- and 30-year loan terms are usually available
- Fixed-rate and adjustable-rate mortgages are available.
- Down payment gifts and/or down payment assistance can cover 100 percent of the down payment and closing costs.
On the con side:
- You will need to purchase PMI up front.
- FHA loan limits are lower than conforming loan limits so you might not be able to get the amount you need for the home you want.
If you served in the military, you can qualify for a loan with no down payment whatsoever. Interest rates are lower than standard loans and you do not need to purchase mortgage insurance. Veterans, active-duty service members and surviving spouses are all eligible.
These loans are intended for low-income to moderate-income home buyers who plan to purchase a home in a rural area. Eligibility requirements are strict, but if you qualify, you will not have to make a down payment or pay for mortgage insurance. Credit scores starting at 640 are eligible. Income limits must be met and a fixed-rate, 30-year term is the only option.
If you have really good credit, a large cash reserve and want to purchase an extremely expensive home, you may be a candidate for a jumbo loan. Jumbo loans are for homebuyers whose loan amount exceeds Fannie Mae and Freddie Mac’s stated loan limits. These loans usually come with higher monthly payments, but the down payment can be as low as 5 percent with some lenders.
How Do You Choose?
Now that you know the basics you can begin deciding. Pick a few that seem right for you. Use this handy mortgage calculator to estimate your monthly payment. Compare them here. Then speak to your lender. It won’t be long before you find the right mortgage, leading you to your perfect home in Sierra Vista.
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