As you set out on your home buying journey, one of the first things you will want to learn about is what types of home loans are available. Home loans, also known as mortgages, are a type of loan used to purchase a home. Before you find the property of your dreams, it is good to have a thorough understanding of your mortgage options. Then, when you find a home and want to put in an offer, you’ll be ready.
There are several types of home loans available in the United States, each with its own set of terms and conditions related to interest and repayment. Among these options, there is a fit for all kinds of prospective buyers. Understanding the different types of home loans can help you choose the right loan for your needs and financial situation.
In this article, we will cover 5 types of home loans:
We’ll also break down 3 types of terms and conditions for loans. The terms set out your repayment plan and interest rates:
Conventional loans are the most common type of home loan in the US. In fact, the 30-year, fixed-rate conventional mortgage is the most popular choice for US homebuyers.
Conventional loans are not backed by the government and are typically issued by banks or mortgage lenders. The terms and interest rates on conventional loans can vary widely depending on the borrower's credit score, down payment, and other factors. Their popularity lies in the fact that the overall borrowing cost after fees and interest tends to be lower than an unconventional loan. Conventional loans typically require a higher credit score and down payment than government-backed loans.
Best for: borrowers with a good credit score and ability to provide a sizable down payment
FHA (Federal Housing Administration) loans are government-backed loans that are designed to help low- and moderate-income borrowers buy a home. These loans are issued by FHA-approved lenders and offer more lenient credit requirements and lower down payment requirements than conventional loans. However, FHA loans require borrowers to pay mortgage insurance premiums for the life of the loan. This can increase the overall cost of your mortgage.
Best for: low- and moderate-income borrowers who may not meet credit score or down payment requirements for a conventional loan
VA (Veterans Affairs) loans are available to current and former members of the US military and their families. These loans are backed by the government and are issued by VA-approved lenders. VA loans typically require no down payment, credit score requirement, or mortgage insurance. VA loans offer competitive interest rates.
However, borrowers are required to pay a funding fee, which can be added to the loan amount. Because VA loans do not require mortgage insurance or down payments, there has to be some sort of protection in place for lenders. This funding fee helps reduce the cost to taxpayers in the event that the loan goes into default.
If you qualify for a VA loan, it can be a very powerful way to get into homeownership!
Best for: borrowers who are current or former members of the US military and their families
USDA (US Department of Agriculture) loans are available to low- and moderate-income borrowers in rural areas. USDA loans are backed by the government and issued by USDA-approved lenders. These loans are designed to help borrowers purchase a home in an eligible rural area and offer competitive interest rates and no down payment requirements. Similar to the VA loan’s funding fee, USDA loans have extra fees, but they can often be financed with the loan.
If you’re looking for a home in the San Francisco Bay Area or LA, this isn’t very applicable to you because we don’t have many rural areas.
Best for: low- and moderate-income borrowers who live in rural areas
Jumbo loans are a subtype of conventional loans that exceed the maximum loan limit set by Fannie Mae and Freddie Mac, which are government-sponsored entities that purchase and guarantee mortgages. Jumbo loans are typically used to purchase high-value properties and require a higher credit score and down payment than conventional loans.
In the Bay Area and Los Angeles, real estate costs are high compared to the national average. The federal government accounts for this, extending the baseline limit for Fannie Mae and Freddie Mac loans in many parts of California. In 2023, the baseline limit in most parts of the country will be $726,200, but extends up to $1,089,300 for single-family homes and condos in all Bay Area counties except Napa, Sonoma, and Solano. The limits in those three counties are a bit lower, but still higher than the national average. The $1,089,300 limit applies to Los Angeles as well.
Simply put, you may be able to get a conventional loan in Los Angeles, San Francisco, or other Bay Area counties that would be a jumbo loan in another part of the country.
Best for: borrowers who are purchasing high-value properties and have a high credit score and down payment amount
First, you need to consider what type of home loan is the best fit for your unique financial situation. The next step is to consider the terms and conditions for repaying that loan.
Let’s break down the options related to interest rates, monthly payment structures, and length of repayment.
Fixed-rate loans have a fixed interest rate for the life of the loan. This means that the monthly payment and interest rate will remain the same throughout the loan term, which is typically 15 or 30 years. Fixed-rate loans offer stability and predictability, making them a popular choice for borrowers who want to budget their monthly expenses.
Best for: those who want a predictable monthly payment for the life of the loan and plan to stay in their home long-term
Adjustable-rate loans, also known as ARMs, are 30-year loans with interest rates that change over time as market conditions change. The interest rate is typically fixed for an introductory period (3, 5, 7, or 10 years), and then it adjusts annually based on market conditions. At the end of your introductory period, the interest rate adjusts annually based on market conditions. There are rate caps, so that your interest rate cannot exceed and go below a certain amount.
Adjustable-rate loans can offer lower initial interest rates than fixed-rate loans, but over time, the monthly payment can fluctuate and become unpredictable. This is a popular choice for our clients who know they plan to sell before the fixed period is over.
Best for: borrowers who want lower initial interest rates and know they plan to sell before the fixed period (eg. 3, 5, or 7 years) is over
Interest-only loans allow borrowers to pay only the interest on the loan for a certain period, typically 5 or 10 years. After the interest-only period ends, the borrower must begin making payments on both the principal and interest of their loan.
Interest-only loans can offer lower monthly payments during the interest-only period, but they can be riskier and more expensive in the long run. Similar to ARM loans, if you plan to sell before the interest-only period expires, this type of loan could be beneficial to you.
Best for: borrowers who want to begin with lower monthly payments and plan to sell before the interest-only period expires
As this breakdown of home loan types and terms shows, there are several options for home loans available in the US. Understanding the different types of home loans can help you choose the right loan for your needs and financial situation. Before applying for a home loan, it's important to research your options and compare the terms and interest rates offered by different lenders.
If you do all of your research up front, then when the perfect property becomes available, you are ready to make a move.
At Willowmar Real Estate, we are here to help. Send us an email at [email protected] for any questions or for more information. We would love to partner with you on your home buying journey, from figuring out all the financial details to finding your dream home.
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