If you are purchasing a property for the very first time, you will almost certainly need to take out a mortgage to afford your new home. This is a loan, secured against your property, that is repaid over a period of years. After the term of your loan, you will own your property outright. Most mortgage loans require a down payment, and your lender will charge you a rate of interest which is worked out as a percentage of your loan. The exact rate of interest you will repay will largely depend on your credit score, as this will tell the lender how well you manage your money and how much of a risk they are taking by loaning to you.
Not all mortgages have been created equal and you will need to understand what options are available to you as this will help ensure that you get the most cost-effective mortgage loan possible.
So, what are the different types of mortgage loans?
Fixed or Adjustable Rate Loans
Most homebuyers will expect to have to choose between fixed and adjustable rate loans. As their names suggest, the difference between the two is the interest rate that you will repay and how it affects your repayments. A fixed rate mortgage loan will ensure that your repayments will stay the same every month for the term of the loan. However, an adjustable rate mortgage will have an interest rate that fluctuates, and this may mean that the exact amount you will repay will vary.
While it is easy to assume that a fixed rate mortgage loan will be the best option, the interest rate associated with a fixed rate tends to be higher than that with an adjustable rate mortgage. Most homeowners find that they need to decide between whether they would prefer stability in their repayments, or a potentially lower rate of interest.
Some lenders offer a combination of both fixed rate and adjustable rate mortgages. They do this by beginning the loan period at a fixed rate for a fixed term, and then moving to an adjustable rate once this has finished.
A conventional mortgage loan is one that is not guaranteed or insured by the federal government. This means that if you default, your lender is liable for any damages that are incurred, such as if you default on your loan.
In comparison, a government-insured loan ensures that your lender is protected against any losses that might occur if you, the borrower, default on your loan. A key benefit to a government-insured loans is that you can typically be approved for them with a much smaller deposit – sometimes as little as a 3.5% down payment will secure your mortgage. However, since you will be liable to pay the cost of the mortgage insurance, your repayments will be more expensive.
Government-insured loans for military personnel
If you are a military service member, you may be eligible for a VA loan. This is also guaranteed by the federal government and means that the U.S. Department of Veterans Affairs (VA) will be responsible for reimbursing the lender if you were to default on your loan. One of the biggest advantages of a VA-insured loan is that you may be able to finance your entire property purchase without needing to spend years saving for a down payment.
Loans for rural borrowers
Being able to borrow enough to secure a property purchase isn’t something to be taken for granted, and some people simply earn too modest an income to be able to secure regular financing. This can be particularly true in some rural areas where incomes tend to be lower, making it much more difficult for those individuals to get onto the property ladder. To help combat this problem, the U.S. Department of Agriculture (USDA) has a loan program specifically for rural residents who conform to the stringent requirements.
Although mortgage choices can seem overwhelming, there really is a mortgage for virtually all types of borrower. If you would like advice on finding the best mortgage for your property purchase, our dedicated and experienced realtors will be happy to assist you. Please do not hesitate to get in touch and contact us today.