Buying a home? Chances are you are financing the purchase, in which case you’ll need to apply for a mortgage. It helps to know about the different options you have for financing:
Conventional Mortgages
A conventional mortgage is a loan not backed by a government agency such as FHA, USDA, or VA. These loans can be conforming or non-conforming. A conforming loan meets the guidelines set forth by Fannie Mae and Freddie Mac, whereas a non-conforming loan does not. Conventional loans typically require a higher credit score and a larger down payment than government-backed loans. These loans can be fixed rate or adjustable rate mortgages.
Fixed Rate Mortgages
A fixed rate mortgage is a loan where the interest rate remains the same throughout the life of the loan. This means that your monthly payment will not change, making it easier to budget for your mortgage payment. Fixed rate mortgages are a good option for people who plan to stay in their home for a long time and want the peace of mind that comes with a consistent mortgage payment.
Adjustable Rate Mortgages (ARMs)
An adjustable rate mortgage, or ARM, is a loan where the interest rate is fixed for a period of time (usually 5, 7, or 10 years) and then adjusts annually based on a specific index, such as the LIBOR or the Treasury index. This means that your monthly payment can fluctuate, potentially making it harder to budget. ARMs are a good option for people who plan to move or refinance before the rate adjusts.
FHA Mortgages
An FHA mortgage is a government-backed loan insured by the Federal Housing Administration. These loans are popular because they require a lower down payment (3.5%) and have less strict credit score requirements than conventional loans. FHA loans are fixed rate mortgages, and the interest rate is typically higher than conventional loans. These loans also require mortgage insurance premiums, which can increase your monthly payment.
USDA Mortgages
A USDA mortgage is a government-backed loan designed for people who want to buy a home in a rural area. These loans require no down payment and have lower credit score requirements than conventional loans. USDA loans are fixed rate mortgages, and the interest rate is typically lower than conventional loans. These loans also require mortgage insurance premiums, which can increase your monthly payment.
VA Mortgages
A VA mortgage is a government-backed loan available to eligible veterans and active-duty military personnel. These loans require no down payment and have less strict credit score requirements than conventional loans. VA loans are fixed rate mortgages, and the interest rate is typically lower than conventional loans. These loans do not require mortgage insurance premiums, which can lower your monthly payment.