One of the best long-term investments that you can ever make is buying a home. Those who own a home, and live in it for an extended length of time, will likely build more personal equity than those who choose to rent. When purchasing a home, it will likely require taking out a loan. Prior to purchasing a home, and taking out a mortgage, there are a variety of mortgage types to consider.
Mortgage Types To Consider
Fixed Versus Adjustable
The first factor that needs to be considered when applying for a loan is to decide whether you want a fixed or adjustable rate mortgage. Mortgages are intended to be long-term loans, with repayment terms up to 30 years.
In most cases, people choose to lock in their interest rate for the entire term of the loan through a fixed-rate mortgage. However, these mortgages require banks to take on some form of interest rate risk for an extended length of time. Because of this, they need to charge higher interest rates to compensate for the risk.
On the other hand, adjustable rate mortgages have a fixed-rate period for a much shorter length of time. This is commonly three to seven years.
After the fixed-rate period is over, the rate will adjust to market levels. With these mortgages, a borrower will start with a much lower rate. But takes on the risk that it will increase in the future. Almost all types of mortgages can come with either fixed rate or adjustable rates.
One of the most common mortgage types are conventional mortgages. A conventional mortgage is one that is not, in any way, guaranteed or insured by the federal government.
Because of this, banks are taking on more risk if the loan goes into default. To compensate for the risk, banks often require larger down payments and have tighter credit and income requirements for their borrowers. Conventional mortgages can be either fixed or adjustable and can come with very low interest rates.
For those who are entering the housing market, one of the best options for a loan is an FHA mortgage. An FHA mortgage is a loan that is fully guaranteed by the federal government.
These loans are designed to help people purchase a home if they do not meet conventional loan qualifications. FHA mortgages typically require a down payment of three percent.
They also have looser credit and income requirements than conventional mortgages. However, they can be more expensive and require the borrower to pay private mortgage insurance.
For veterans of the U.S. Armed Forces, one of the best options for a home loan is to get a mortgage through the VA. The Veterans Association provides mortgages that are fully guaranteed by the federal government.
These mortgages are designed for members of the VA, and their surviving spouses, to purchase a home with less money down. VA mortgages tend to have higher rates than conventional mortgages, but they often require no money down at closing.