Choosing the Right Type of Home Loan and Understanding Interest Rates
Interest is an integral element of all loans. Whether you’re taking out a home loan, auto loan, credit card or any other type of loan, understanding interest rates is essential so that you can make informed decisions.
Selecting the Appropriate Type of Home Loan
Mortgages come in many shapes and sizes. Your decision on which type depends on several factors, including your credit history, income potential and down payment size. While many people opt for 30-year fixed rate mortgages, that may not always be the most cost-effective option available to you.
Other mortgage options to consider are adjustable-rate mortgages and balloon mortgages, which tend to be tailored towards home buyers with less-than-perfect credit histories.
Adjustable-rate mortgages (ARMs) are an attractive option for homeowners with lower credit scores, since they begin with low interest rates that can adjust according to market changes. Being more adaptable than fixed-rate mortgages, ARMs may allow homeowners to achieve homeownership sooner with lower monthly payments.
Contrary to traditional fixed-rate loans, ARMs also feature a cap on their rate changes so you won’t end up paying more than you can afford for monthly mortgage payments. However, you may need to pay an additional fee when your interest rate adjusts or when selling your home.
Conventional Loans
Conventional mortgages are the most popular home loan type. Usually insured by the government, these mortgages can be obtained with fixed or adjustable rate options. Unfortunately, they come with stricter credit criteria and often require a down payment of 20% or more in order to avoid private mortgage insurance costs.
FHA Loans
Federal Housing Administration-backed mortgages are designed to make home ownership more accessible for first-time homebuyers. Those with excellent credit can get an FHA loan with a down payment as low as 3.5%, while those with average or less-than-stellar credit still qualify with down payments as low as 10%.
When considering these loans, there are a few things to keep in mind: The lower your down payment, the higher the interest rate. This is because you will have to pay private mortgage insurance on any amount not put down – an expense which adds up over time.
Selecting the Right Loan Term is another critical decision to make. Shorter-term loans usually have higher monthly payments, but can save you thousands of dollars in interest over its life.
If you’re uncertain of the most suitable loan term for your needs, ask your lender to suggest one that would fit. They can assist in comparing and contrasting various options to identify which one best meets your requirements.
Finally, the best way to select a loan is by researching different loan types and speaking with lenders who specialize in them. They can explain the advantages of each option and give you an accurate estimate for your mortgage payment. Moreover, lenders provide quotes on multiple types of loans so that you can decide which fits best into your budget.
