Buying a home is probably the biggest purchase you will ever make, and there’s a good chance you don’t have the money to pay the full cost of the home out-of-pocket. Thankfully, you may qualify for one of several real estate loans that are available to homebuyers. The trick is knowing which type of mortgage is right for you so that you don’t get yourself into a long-term commitment that can ruin your finances. Here are some of the types of real estate loans that are available to homebuyers.
This is the most common type of real estate loan used by homebuyers, and it is the easiest to understand. With a fixed-rate mortgage, the interest rate will never change throughout the term of this type of mortgage. Also, your monthly payment will never change regardless of the length of the term of the mortgage or economic conditions.
An adjustable-rate mortgage, or ARM, is known as a hybrid loan because the interest rate will start off as a fixed rate for a certain number of years. When this period is over, the interest rate will change every year thereafter. Typically, the ARM will have a fixed rate for the first five years before it starts to adjust. When your interest rate changes, your monthly payment will also change. Before the five-year period is over, you should refinance your ARM to a fixed-rate mortgage to avoid the chance of your interest rate going up.
Real estate loans are either conventional or government-insured. The only difference between these two types of loans is that a conventional loan is not insured or guaranteed by the U.S. government. There are three types of government-insured real estate loans:
- FHA – If you are a first-time homebuyer or you have a challenging credit history, you may qualify for an FHA home loan. You can have a credit score as low as 580, and you can have a down payment as low as 3.5% of the selling price of the home you want to buy.
- VA – This loan is for military veterans and their surviving spouses. It is administered through the Veterans Administration, and if you qualify for this loan, you can purchase a home with 100% financing with zero money down.
- USDA Loan – This loan is administered by the U.S. Department of Agriculture. If you want to live in a designated rural area, you can purchase a home with 100% financing with zero money down. Many designated rural areas throughout the country are relatively close to metropolitan areas.
There are over a dozen loans that can be used to buy a home. Before making a purchase, you should work with a lender to see if you qualify for a mortgage and to see how much money you can get. Most importantly, no matter how much money you qualify for, make sure you can afford the monthly payment.