On May 1st, 2024, the rates for 30-year mortgages rose to 7.36%. However, shorter-term 15-year loans were still available at only 6.51% interest. Knowing which loan terms suit you the best will help you shortlist a few among the several types of home loans available
Whether you’re a first-time home buyer or an investor, various home financing options are available. The kinds of loans available are government-backed loans, which are easier to qualify for and come with government insurance.
On the other hand, conventional bank loans are based on your financial situation and credit score. To choose the best type of home loan, Houzeo can simplify this process for you with its list of mortgage lenders near you.
What Are the Different Types of Home Loans?
There are different types of home loans to suit your needs. The three types of mortgage loans that are listed below are refinance, conventional, and government-backed loans. Let’s look at each loan in detail below:
1. Conventional Loan
Conventional loans offer flexibility and competitive rates, which makes them popular among eligible homebuyers. Banks provide these loans to buyers with good credit and a down payment. Moreover, this translated to lower interest rates and flexible loan terms as compared to other loan options.
| Pros | Cons |
| It can be used to finance investment or rental properties and primary, secondary, or vacation homes. | Conventional loans require PMI if your down payment is less than 20%. |
| You can get rid of PMI once you reach 20% equity. | Conventional loans may have higher interest rates for borrowers with lower credit scores. |
| Interest rates on conventional loans are frequently competitive, particularly for borrowers with excellent credit. | There is a lower minimum debt-to-income (DTI) ratio than for other mortgage |
2. FHA Loan
FHA loan are insured by the Federal Housing Administration. This loan typically requires a lower down payment. Furthermore, FHA loans can make home financing more accessible by allowing you to qualify for down payment assistance programs.
However, FHA loans have two main drawbacks, as they require upfront and ongoing mortgage insurance premiums. They also have loan limits that restrict how expensive a home you can buy depending on your location.
| Pros | Cons |
| Assumable FHA loans allow a buyer to assume an existing FHA loan when buying a property. | Local restrictions apply to FHA loans, which have lower limits than those for conventional loans. |
| FHA Loan offers more flexible credit requirements | Like VA funding fees, FHA loans might also have a funding fee that raises the loan’s initial expenditure of funds. |
| FHA loans typically require a lower down payment as compared to conventional loans. | While FHA loans offer a 203(k) renovation loan option, the procedure might be more complex and restrictive. |
3. VA Loans
A VA loan is a mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans and active-duty service members. It offers several major benefits to those who meet the criteria. This includes no down payment, competitive interest rates, and no PMI requirement.
| Pros | Cons |
| VA loans offer competitive interest rates, saving borrowers money over the loan term. | Funding fees for VA loans could be necessary, raising the initial expenses. |
| VA loans have lower monthly mortgage payments because they do not require PMI. | VA loans necessitate a VA appraisal to make sure the house fulfills requirements. |
| These loans are assumable, allowing you to take over the loan in certain situations. | VA loans typically require the borrower to occupy the property as their primary residence. |
4. USDA Loans
A USDA loan, or a Rural Development loan, is a mortgage the United States Department of Agriculture offers to encourage homeownership. One of the key benefits of this loan is that it does not require a down payment.
| Pros | Cons |
| Mortgage insurance rates are reduced for USDA loans. | Borrowers must meet income limits based on the area’s median income |
| USDA loans might have fewer credit requirements, allowing you to have lower credit scores. | USDA loans may take longer to process compared to conventional loans. |
| Properties in approved rural and suburban areas are eligible for USDA loans. | A one-time guarantee fee and an annual mortgage insurance fee are required for USDA loans. |
5. Jumbo Loan
Jumbo loans are specialized mortgages intended for high-end properties that are beyond the reach of standard loans. It is a kind of lifesaver for those aiming to buy luxury homes. The loan limits in the US vary between $766,550 and $1,149,825 depending on location.
With more qualifying standards and possibly higher interest rates than traditional loans.It enables you to finance the house of your dreams.
| Pros | Cons |
| It provides easy access to large sums of money, upwards of $766,550 | A larger down payment is necessary. |
| The conventional mortgage options include fixed or adjustable rates and 15 or 30-year terms. | Not all lenders offer jumbo loans, so you might have fewer options. |
| Interest rates are similar to those of conforming loans. | In jumbo loans, there are strict qualifying standards, like high income and minimal debt |
6. Bridge Loan
A short-term loan called a bridge loan is used to close a deal on a house before selling the current one and buying a new one. This type of home loan has a quick approval process, which permits buyers to access funds easily.
| Pros | Cons |
| Bridge loans offer flexibility in timing, allowing borrowers to purchase a new home. | Bridge loans require repayment within a short period, usually six months to a year. |
| By using this loan, borrowers can avoid the timing problems that come with buying and selling a house. | Additional fees and closing costs, such as origination and appraisal fees, may apply to bridge loans. |
| Bridge loans remove the need for conditional offers on new home purchases, giving borrowers a competitive advantage. | If the borrower is unable to sell or secure the property, there is a greater risk associated with a bridge loan. There are more chances of default and foreclosure. |
7. Fixed Rate Mortgage
A fixed-rate mortgage offers an interest rate that remains fixed for the entire loan term. Fannie Mae is predicting that mortgage rates will average 7% in 2024. This stability allows borrowers with fixed-rate mortgages to have regular monthly payments, making budgeting and financial planning easier.
| Pros | Cons |
| For borrowers who intend to live in their homes for a long time, fixed-rate mortgages are the best option. | Fixed-rate mortgages offer less flexibility compared to ARMs. |
| To benefit from future drops in interest rates, fixed-rate mortgages can be refinanced. | If interest rates drop after you lock in your rate, you will not benefit from the lower market rates. |
| A fixed-rate mortgage shields borrowers from interest rate increases. | Longer term lengths on a fixed-rate mortgage result in higher total interest payments. |
Adjustable Rate Mortgage
An adjustable-rate mortgage is a type of home loan that has an interest rate that can fluctuate regularly depending on the state of the market. Many ARMs have a fixed-rate initial period where the interest rate stays the same.
| Pros | Cons |
| Monthly payments for borrowers with adjustable mortgages could be reduced if market interest rates drop. | Borrowers with ARMs might pay more each month if market interest rates rise. |
| ARMs can be a good option for borrowers who plan to sell or refinance their homes. | Minimum payment options on some adjustable rate mortgages (ARMs) could lead to negative amortizations. |
| ARMs typically have lower starting interest rates than fixed-rate mortgages. | Interest rate fluctuations could leave borrowers with adjustable-rate mortgages uncertain about their future mortgage payments. |
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What to Consider Before Choosing a Mortgage?
Selecting a mortgage is a big financial decision, so you should carefully weigh your options before selecting/choosing one. Here are some key considerations to keep in mind:
- Requirements for Down Payment: Figure out how much you can afford to contribute to a down payment. Keep in mind that a larger down payment can lower your loan amount.
- Creditworthiness: Understand the significance of your credit score and history of interest rates and mortgage approval. Check your credit report for any mistakes or problems that require attention.
- Loan Options: Examine various mortgage options, including adjustable- and fixed-rate mortgages. Recognize the advantages, disadvantages, and possible risks connected to each loan type.
- Home Value Estimate: A free home price estimator tool can be your first step toward mortgage preapproval. You’ll know how much you’re eligible for by accurately estimating your home’s value.
- Calculate Your Mortgage Payments: To better understand how different loan amounts, interest rates, and down payment sizes can impact your monthly payments, use a mortgage calculator. It will help you visualize your financial commitment and assists in budgeting for your new home.
Bottom Line
By evaluating your financial situation, understanding the various house loans available, and considering factors such as interest rates, terms, down payment requirements, and long-term plans, you can make an informed decision that meets your needs and goals.
Houzeo is one of the leading real estate transaction platforms in the US, and can help you make better, informed decisions. Check out our list of mortgage lenders near you to find one that suits your needs.
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Frequently Asked Questions
What are the different types of home loans available?
A variety of home loan options are available, such as USDA, VA, FHA, jumbo, adjustable-rate, and fixed-rate mortgages.
What is a fixed-rate mortgage?
A fixed-rate mortgage is a type of home loan where the monthly payments are predictable due to an interest rate that stays the same for the duration of the loan.
How does an adjustable-rate mortgage (ARM) work?
The interest rate on a home loan with an adjustable-rate mortgage changes regularly. It depends on the state of the market, usually following an initial fixed-rate period.
