We all know that buying a home is a big decision. In fact, it’s probably the biggest purchase decision you’ll ever make. That’s why choosing the right mortgage is so important. There are so many options when it comes to home loans that the process can be downright confusing, especially for first-time buyers. Choosing the best home loan for you is about more than just understanding how much you can afford. You already have a list of monthly bills to consider before adding a new expense, so you need to ensure you’re making a smart choice. Keep reading for a guide to choosing the best home loan for your financial situation!
What Type of Loan is Best?
There are two types of loans you’ll likely be considering. First, you can get a conventional loan which is guaranteed by a private lender or bank. The second type of loan is a government-backed loan. While conventional loans vary by lender, there are three main forms of government-backed loans. The first and most common government-backed loan is an FHA loan which is insured by the Federal Housing Administration. These are designed specifically for first-time buyers and they allow for low down payments for those who qualify.
The other two types of government-backed loans are less common but can be great discounts for those who qualify. VA loans are insured by the Department of Veteran Affairs and they’re known for being very affordable. Designed for veterans, surviving spouses, and active duty military members, VA loans are known for low to no down payment options and competitive rates. The final type of government-backed loan is a USDA loan which is backed by the U.S. Department of Agriculture. USDA loans are for those in specific rural areas who meet income requirements.
Conventional loans generally have terms of 10, 15, 20, or 30 years and require larger down payments. For conventional loans, home buyers are expected to give a more substantial down payment of 5% or higher. Conventional loans are great for those who can afford a large down payment. For those who need extra assistance, a government-backed loan is likely the best choice.
Understanding Interest Rates
Once you’ve decided on the type of loan that’s right for you, you’ll need to choose an interest rate. There are two types: fixed or adjustable rates. This is how you’ll be charged on a monthly basis, so it’s an important part of your overall decision. Fixed-rate interest rates never chant. You’ll be paying the same amount for the duration of the loan. On the other hand, adjustable rates rise and fall at intervals based on the market.
In general, fixed-rate interest rates are ideal for those who plan to live in their home for a long time and require stability. These types of loans make it easy to anticipate monthly costs which are perfect for families and those settled. For younger people or those who plan to move in a few years, an adjustable rate might result in more savings since there is usually a lower introductory rate on home mortgages.
Finally, How Large is Your Loan?
Loans fall into two categories based on size: conforming and non-conforming. Conforming loans fall into government-sponsored limit guidelines. Depending on where you live, this number might vary. Non-conforming loans, also known as jumbo-loans, are for borrowers who take on loans higher than the conforming loan limit for their region. These are riskier loans which carry a higher interest rate. In order to qualify for a jumbo loan, you’ll need a high down payment and excellent credit. Non-conforming loans can also include those to borrowers with poor financial statuses.
Choosing the Best Loan
While home loans can be confusing, it’s worth taking the time to explore your options. You should start your home search by taking inventory of your finances. Where do you stand currently, and how much can you afford to spend on a home? From there, you’ll know what type of loan is right for your economic status and needs! When in doubt, be proactive with your credit and downpayment to keep yourself in a good place to start off the homebuying process on the right foot.