Seeking a Home Mortgage? Explore 6 Options for a Smart Investment
While buying a new home is thrilling, it can be a challenging experience, as well. The thrills can be restored when potential home buyers become more knowledgeable about the process—especially concerning the different ways to finance this major purchase.
Enter the vast realm of home mortgages, also known as home loans. There are a number of home loan types offered by banks, government-backed programs, and combinations thereof. The following types of mortgages are available for many buyers today.
Conventional mortgages are the most common type sought out by home buyers, and they are also known as fixed-rate loans. Essentially, a lender will offer applicants a fixed interest rate for a 10-, 20-, or 30-year loan, with the latter option being the most typical. It's important to understand that the longer loan period chosen, the more interest will be paid over the life of the loan.
Adjustable-rate mortgages (ARMs) differ from conventional mortgages in one primary way: ARM interest rates can fluctuate up or down periodically while conventional loans stay the same. The catch is that many ARMs begin at lower interest rates, but they can change after the conclusion of the introductory period as defined by the contractual agreement. Adjustable-rate loans are rather risky, as the ‘new' rates are determined by market conditions. More often than not, interest rates are increased.
Interest-only mortgages are not ideal, as they require buyers to pay accrued interest on their home purchase for a set duration. This means that no escrow is being established in the home itself, so it will cost more in the long run with this option, as home interest rates might increase at the end of the term when it's time to lock in a new rate. The main perk is that interest-only home loans allow buyers who are short on cash the ability to move forward with their ownership goals.
Home Loans from the Veterans Affairs
More commonly called VA loans, only current or retired military members and certain members of their family qualify for this type of mortgage. A major attraction to these loans is that they usually do not require a down payment or stellar credit and offer low interest rates.
Guaranteed by the Federal Housing Administration, FHA loans fall under the guidance of the Housing of Urban Development (HUD). Essentially, FHA mortgages are a good choice for those with low credit scores and would-be buyers with little or no down payment abilities. FHA home loans require a lot of paperwork during qualification, but approved buyers find it well worth the effort.
Is a Balloon Mortgage Best?
In most cases, the answer is ‘no.' Buyers initially pay interest only (and sometimes some principal) for about five years. At the conclusion of the term, the entire balance of the loan must be paid. While this is not a viable option for many, in some instances, it could be a good choice.
Balloon mortgages can be very costly, but they might be a great solution for those who are expecting a large sum of money in the near future. These mortgages are also a viable option for experienced investors with a solid portfolio as a backup financial plan to pay off the loan in full.
Before delving into home loan options on your own, recruit an experienced mortgage broker or professional real estate agent near where you intend to make your home purchase.