Home buyers should consider each loan type prior to viewing homes

As the home market improves, many buyers are considering a purchase in the near future. Despite the responsibilities that come along with owning a home, for most people, it is more rewarding than renting can ever be. The type of mortgage many buyers used during the run up to the housing market collapse is what lead to them being in trouble when the economy began to sour. Before looking at any houses, home buyers should know which mortgage is best suited for their goals and plans. Here is a bit of information on the most common types of home loans.

30-year fixed rate mortgage

Because it allows buyers to purchase the most home with affordable monthly payments, the 30-year fixed rate home loan remains the most popular. On September 1, 2015, the rate was at 3.75 percent. That is up slightly from the previous week and the number of applications increased by more than 11 percent due to positive economic news. In addition to the standard 30 years, fixed rate loans are available in terms of 10,15, and 50 years. The interest rate remains constant for the life of the loan and home owners know what their monthly payments will be regardless of inflation or other fluctuations in the economy.

Adjustable rate mortgages (ARMs)

Many home buyers were caught holding adjustable rate mortgages during the housing crisis. They had planned to refinance or sell their home prior to any increase in their interest rate and monthly payments. When the housing bubble burst, they were unable to sell or refinance and many were unemployed or getting by on less household income.
The rate and monthly payment is adjusted at specific times during the life of an adjustable rate mortgage. The increase or decrease is typically tied to market behavior. Buyers can get the same house as with a fixed rate mortgage for a lower initial payment. The adjustable rate loan remains popular with buyers who do not plan to remain in their home more than five years. Anyone considering an adjustable rate loan should be sure they can comfortably afford their monthly payments, even if the interest rate increases to the maximum possible amount.

Interest only loan

Another loan that lead to trouble for many home owners during the Great Recession was the interest only loan. For a predetermined amount of time, the home owner is only required to pay interest on the loan amount. The interest may be fixed or adjustable. At the end of the term (typically 5 or 10 years) the home owner must refinance or begin paying both the interest and some amount toward principle. Just as with an adjustable rate loan, home buyers should plan for a worst case scenario of not being able to sell their home or refinance.

Federal Housing Administration loan (FHA)

Contrary to what many home buyers believe, an FHA loan is not a government loan. It is written by a privately owned company and insured by the federal government. The qualification requirements for an FHA loan are more lenient than the requirements for a conventional loan. The down payment and closing cost are also much lower for buyers who are purchasing their primary residence. For first-time buyers the down payment can be as low as 3.5 percent. The loan is available on site built homes and mobile homes. There are also special programs for seniors.

U.S. Department of Veterans Affairs (VA loan)

This loan is available to veterans or their widows/widowers. The number of years in service affects the requirements and terms of the loan. Which type of discharge the veteran received from their branch of the U.S. Armed Service also impacts their eligibility requirements and loan terms. Most people who qualify for a VA loan can also obtain a conventional loan with similar interest rate. The main benefit to veterans is that they can get a VA loan with no down payment.

Home buyers should plan for their home purchase months in advance. It is best to review credit scores prior to meeting with loan officers or mortgage brokers to avoid any surprises that could hinder them from qualifying for the best possible loan.