Three Types of Home Loans for New Buyers

Three Types of Home Loans for New Buyers

For first time homebuyers, the most tricky part of the process is often figuring out how much you can borrow and the terms of the loan. There are several loans available, and understanding how each of these will affect you is key to saving money while buying a home.

Fixed-Interest Rate Loans

The most popular type of loan, this loan will allow you to lock in your interest rate over the life of the loan, regardless of the value of the home. Fixed interest rate loans have the advantage of a predictable mortgage amount that will never increase. The majority of fixed interest rate loans carry terms of 15, 20 or 30 years.

FHA backed loans are a type of fixed interest rate loan that make it easier for homebuyers with low income or less than perfect credit to buy a home. FHA insured loan requirements are less stringent than their conventional counterparts, and will allow you to make a smaller down payment to secure your loan. In some cases, you can get an FHA backed mortgage with credit scores below 620, prior bankruptcies or low income. These loans are attractive to first time home buyers who want to get into a starter home.

Adjustable Rate Loans

Unlike the conventional loan, with a locked-in rate, the adjustable rate mortgage, or ARM has a rate that changes from year to year. The major advantage of this is that you may be able to pay less in interest than you would with a conventional loan for part of the mortgage. This also means that if rates go up, your mortgage will as well. Adjustable rate mortgages come with caps that put a limit on how high the rate will ultimately go. Adjustable rate mortgages are attractive to borrowers who are facing high interest rates, either due to market conditions or their individual finances.

Interest Only Loans

Interest only loans allow you to pay just the interest for a fixed period of time. The most common terms for interest only loans are five years, with the remainder of the loan due over the next 25 (on a 30 year loan). These loans are great for people who anticipate earning more money down the road, like newlyweds or recent grads.

Whatever your financial situation, there is a home loan for you. From FHA loans to interest rate only loans, finding the money to buy a home has never been easier.