Mortgage Loan Options

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The first step of the home buying process is knowing which type of mortgage you’re pre-approved for.

While it might sound like a simple process, there are so many different types of mortgages! So, how do you know which one is best for you? Well, it depends. That’s why we’re explaining a few of the most popular mortgage loan options, what their benefits are, and some of their basic qualifications. Keep in mind it’s not 100% up to you to know exactly what type of mortgage you need and whether you meet the qualifications — that’s what your loan officer is trained to help with.

Adjustable rate mortgages, also referred to as ARM, is a mortgage where the interest rate can change over time. If market rates change, your payments might be adjusted up or down accordingly. You won’t be guaranteed the same interest rate for the life of your loan, however, you could save money on initial mortgage payments if the rates are low.

When deciding between a fixed or adjustable-rate mortgage, think about if you could afford higher interest rates should they rise in the future. With an ARM, interest rates are fixed for a set time period, which is usually 5 or 10 years. Interest rates will only adjust up or down depending on how the market looks when that time period is up.

With an ARM, homeowners still have a few options to protect their budgets by taking advantage of interest rate caps and payment caps.

Interest Rate Caps

Interest rate caps provide a limit for how much the interest rate of your ARM could increase. A periodic interest rate cap limits how much the rate would increase or decrease between two adjustment periods (after the first adjustment). A lifetime cap protects the interest rate throughout the life of the loan.

Payment Caps

Similar to an interest rate cap, a payment cap limits how much your monthly payment might increase after an adjustment period. However, instead of interest, it limits the dollar amount of the increase.

Benefits of Adjustable-Rate Mortgages
  • Lower initial interest rates. Because buyers are assuming some risk by going with an adjustable-rate mortgage, you’ll typically have lower initial mortgage payments for the first term of the ARM.
  • Great for short-term homeowners. If you plan on selling your home before the ARM changes its interest rate, it’s typically a great option. If you sell before your initial period is up, you won’t have to deal with any interest rate hikes.

A fixed-rate mortgage is exactly what it sounds like: the interest rate is the same throughout the entire life of the loan. This is the most popular type of mortgage since you’ll know exactly what your payments will look like for the next few decades.

That said, a fixed-rate mortgage could have a slightly higher payment than an adjustable-rate mortgage to adjust for interest rate risks.

Benefits of Fixed Rate Mortgages
  • Fixed interest rate and payments. The biggest pro of this type of mortgage is that you know exactly what you’ll be paying for the life of the loan.
  • Easy to understand. Since the terms of your loan won’t change, it’s easier to understand exactly what you’re paying and why. You won’t be surprised by any future interest rate adjustments.
  • Competitive interest rates. While a fixed-rate mortgage has higher payments than an adjustable-rate mortgage, the rates are still pretty competitive.

Best for first-time homebuyers, FHA loans have low down-payment requirements and lower credit score requirements than other loan types. They can be used to purchase both single-family and multi-family homes, too.

FHA loans are loans insured by the Federal Housing Administration.The FHA protects lenders by backing the mortgage should the homeowner default on their loan. This makes FHA loans an attractive option for lenders, as they can be assured their investment is backed by a trustworthy institution.

Benefits of FHA Mortgage
  • Great for applicants with low credit scores. Depending on your debt-to-income ratio, you could obtain an FHA loan with a FICO score as low as 580 (or even 500 if you have a 10% down payment).
  • Low down-payment requirements. FHA loans require as little as 3.5% down, which can save first-time homebuyers a lot of money.
  • The loan is guaranteed by the government. This makes FHA loans attractive to lenders, as they know they’ll be protected if the buyer is unable to pay their mortgage.
  • Many different loan options are available. FHA loans support refinancing, reverse mortgages, and even renovation loans.

VA loans reward veterans for their service to our country with special financing offers. Reserved for active military members and veterans, VA loans can help you achieve your dream of home ownership. The best part? You don’t even need a down payment.

Existing VA homeowners can also refinance with a VA loan, helping them save money.

Benefits of VA Home Loan
  • No down payment required. This is the absolute biggest pro of a VA loan! You won’t have to put any money down on your house. Compared to the lowest minimum down payment requirement of an FHA loan at 3.5%, this helps you get into a home much quicker as you won’t have to spend years saving up for a down payment.
  • You don’t need great credit to apply. The VA doesn’t enforce any specific credit score requirements. VA loans are much more forgiving when it comes to low credit scores than other types of mortgages.
  • No private mortgage insurance. Typically, you have to pay for private mortgage insurance if you put less than 20% down on your house. Luckily, VA loans don’t require this additional payment, which increases buying power and helps you pad your savings.
  • Additional support. Because this loan is guaranteed by the VA, they may be able to provide help if you struggle to pay your mortgage.

USDA loans are loans through the U.S. Department of Agriculture. Designed to encourage the development of rural land and population growth, USDA loans aren’t just for farmers.

USDA loans can be used for buyers who are looking to purchase or refinance property in any rural area. They’re a great way to build up equity in property in rural areas. Plus, they don’t require a down payment!  

USDA Loan Requirements

They are a bit more stringent than other loan types. Requirements include:

  • Applicants can’t earn more than 115% of the area’s median income.
  • The property must be in a rural area, as defined by the USDA.
  • Property can’t be an investment property or vacation home – it has to be owner-occupied.
Benefits of USDA Home Loan
  • No down payment required. Besides a VA loan, this is the only other type of mortgage that doesn’t require any down payment.
  • Competitive interest rates. The USDA backs each loan, so they’re able to offer low interest rates that aren’t dependent on the market or the buyer’s credit score. The interest rates for USDA loans are almost always better than FHA or conventional loans.
  • Flexible credit requirements. Applicants with low credit scores or no credit history can still be eligible for a USDA loan. This is pretty rare when it comes to mortgage lenders.

Get Pre-Qualified for a Mortgage Today!

You don’t have to know which mortgage is best for you to get started on your journey to homeownership — that’s what we’re here to help with! Contact us and we’ll let you know what your mortgage options are! Then, we’ll get you pre-qualified and ready to start looking at homes.