Buying a House? What Type of Mortgage Loans Are Best?

Buying your first home can be an exciting time. You’ll read up which are the best parts of town to live. You’ll check the styles of homes available. And then you’ll start comparing prices and checking mortgage rates. Sounds simple, right? Just find your dream home and sign for a mortgage…

What Type of Mortgage Loans Are Best?

But buying a home is a huge investment. Mortgages may seem like a simple concept, but there is much more to them than most realize. Will you apply for a fixed or adjustable-rate? Is an FHA loan right for you? Is there a penalty for paying off your mortgage early? These questions can be overwhelming, but picking a type of mortgage loan doesn’t have to be. To keep it simple, here are five of the top mortgage loans, complete with their pros and cons.

types of mortgage loansFixed Rate

Fixed rate mortgages are a budget maker’s dream. Regardless if the interest rates shift upwards through the duration of your loan, your monthly payments will stay the same. This makes fixed rate mortgages beneficial when the rates are high, but can also be a disadvantage when the rates are lower than when you signed for the loan.

Adjustable Rate

Adjustable rate mortgages can fluctuate depending on the current market. If you plan on paying off a significant portion of the principal or refinancing your home early on, adjustable rate mortgages are a great option. They allow you to capitalize on low interest rates and can save you a lot of money over the duration of the loan.

They also carry a potential danger. If you plan on staying in your home awhile, they can be risky. If interest rates rise over time, your payments will as well. This could end up costing you quite a bit more money in the long run.

FHA

The FHA (Federal Housing Administration) loan is a mortgage backed by the United States government, protecting the lender if the borrower happens to be unable to pay back the loan. These are particularly helpful for first time homebuyers since they allow a much lower down payment than conventional loans – in fact you could pay as low as 3.5% down. There are additional qualifications, such as the property needing to be owner occupied (basically you can’t just rent it out). They are otherwise identical to a conventional fixed rate loan.

Some sellers (particularly in hot real estate markets) are reluctant to accept buyers with FHA financing because there is more due diligence required. The appraisal must come in equal or greater than the purchase price and there is a mandatory inspection that must occur, which also increases the amount required to close. However, it’s still an excellent choice for first time home buyers who aren’t able to afford a big down payment.

203K FHA

203K FHA mortgages are best when buying a house that needs some work. With a 203K, you can finance any renovations you need when you purchase the home. This is beneficial because it puts all of the cost into a single loan. While the convenience is a definite pro, this type of mortgage takes much longer to close. Close work with licensed contractors is required to receive proper estimates for the renovations and can get complicated. Make sure to only pick lenders who are familiar with the process, otherwise closing could get difficult.

VA Loans

VA loans are a great alternative for veterans. One of the biggest benefits is that typically no down payment is needed. Along with no down payment, there is also a cap put on closing costs. Though these make it easier to qualify for a loan, they often come with a hefty upfront fee ranging from 0.5% to 2.8%, depending on the time served, previous loans, and other factors. VA loans usually take longer to close than a conventional loan as well.

Your Free Mortgage Guide

Understanding a mortgage doesn’t have to be difficult. Tiffany, from InvestmentZen, developed a fantastic guide that teaches you all that you need to know about mortgages in simple terms you can understand (Check it out – The Definitive Guide to Mortgages). In it, you’ll learn more about the different types of mortgage loans, but also about important concepts like loan rates and how much money you need to save for a down payment.

When Tiffany first reached out to me, I almost passed up her email thinking it was another spammy advertiser looking to sell me on a crappy product. I’m soooo glad I stopped and clicked the link. It truly is a fantastic resource, and I’m pumped to share it with you! Buying a house is a HUGE step in your financial life. Make sure you’re well-informed before you agree to something you’ll regret!

Which type of mortgage loan will you choose? For me, it’s a 15-year fixed loan every time!

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6 comments to Buying a House? What Type of Mortgage Loans Are Best?

  • whiskey

    Thats a good, 101 class on mortgages. It’d been nice to see they’re breakdown or explanation on 30yr vs 20yr vs 15 etc etc. with a graph or two, so a potential buyer will know what they are going to be hit with overall. Or maybe a link to a good mortgage calculator…
    I’ve heard rumblings of 40+yr mortgages which, while may be the norm in other countries, its definitely not normal here nor would I personally get one. (15yr max for sure).
    I’d like to learn more about rentals, flipping, investing etc. as Im looking to expand my “empire”… mwhahahaaa…

  • The thing that concerns me is liquidity. You are buying a house, and going in with the mindset that you aren’t going to push it, instead of 28% of income going to the mortgage, you want a cushion, and agree with the spouse that 20% is the limit. But that’s with 30 year mortgage. So you look and see that even with the lower rate at 15 years, the payment is 50% higher. Back to 30% for the payment.

    In my opinion, it’s tough to mix the two goals, the low debt ratio from the mortgage as well as the short term. The $60K couple, with 20% going to the 30 year mortgage can afford a $210K loan, but the number drops to $140K when you push the term down to 15 years. If they push their payments higher, they’ll have little discretionary money when unexpected expenses arise.

    In the end, I agree with the intent here, it just can get tough in real life.
    JoeTaxpayer recently posted..Can You Afford to Buy a Home?

    • The idea is, you’ve got to be free of your consumer debt going into the house purchase. Then, with a 15 year fixed, your mortgage payment should be less than 25% of your take-home pay. Granted, this will buy probably 1/3 of the house everyone else is hunting for, but you’ll be so much better in the long-run for it.

  • With mortgage rates so low, I just don’t see much value in an adjustable rate these days. There is probably a bigger chance of them adjusting upward then there is of going down further. It seems high risk, low reward.
    Money Beagle recently posted..6 Easy Tips for Saving Money This Summer

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