August 16th, 2019 8:31 AM by Jackie A. Graves, President
FHA. 30-year conventional. 15-year term. With so many loan
options out there, how do you know which is best? There is not one
across-the-board winner because everyone’s situation is different. But there
are pros and cons of each that might make one loan work better for you. We’re
comparing and contrasting some of the most popular options to help you make the
best choice when buying a house.
This is a 30-year loan with rates that are fixed every month.
These loans follow Fannie Mae and Freddie Mac guidelines and are not backed by
the government like FHA loans.
Pro: With set payments,
there’s no need to worry about rising rates. Loans are available for a range of
buyers, with options like HomeReady and Conventional 97 that
offer as little as 3% down. Also, there is no upfront mortgage insurance fee
like you have on FHA loans.
Con: You have to pay
PMI if you put less than 20% down. There also may be higher credit score
requirements than FHA loans.
A 15-year fixed-rate option also has fixed rates for the life of
the loan. If you’re the type who wants to pay your home off more quickly, this
could be a good choice.
Pro: You pay far less
interest over the life of the loan and pay off your home in half the
Con: Monthly payments
FHA loans are federally insured, which is why down payment and
credit score requirements are more relaxed.
Pro: FHA loans require
as little as 3.5% down. Credit score requirements are also lower than
conventional loans. You can typically qualify for a loan with a 3.5% down
payment at a 580 score, and may be able to get a loan with a score as low as
500 if you have 10% down.
Con: You’ll have to pay
mortgage interest, which you can’t get rid of unless you refinance. FHA loans
also come with an upfront mortgage insurance fee.
“An adjustable-rate mortgage (ARM) is a type of mortgage in
which the interest rate applied on the outstanding balance varies throughout
the life of the loan,” said Investopedia. “Normally,
the initial interest rate is fixed for a period of time, after which it resets
periodically, often every year or even monthly. The interest rate resets based
on a benchmark or
index plus an additional spread, called an ARM margin.”
Pro: Rates are often
lower during the introductory or fixed period than what a borrower can get with
a fixed-rate loan, making homeownership more affordable initially.
Con: Once the ARM gets past
the fixed period, monthly payments can skyrocket, leaving owners unprepared and
possibly in danger of defaulting.
Looking to buy in a rural area? You may qualify for a USDA loan.
USDA-eligible homes may also be located in some suburban areas. You can check
eligibility on their website.
Pros: USDA loans offer
low or even no down payments and low interest rates. Rates can be as low as 1%
with subsidies on direct loans.
Cons: Household income
is capped and a mortgage insurance premium is required for down
payments under 20%.
Veterans Administration (VA) loans help military members
and veterans purchase homes.
Pro: VA loans tend to
have the lowest average interest rates, and loans are available with no down
payment. In addition, there is “no monthly mortgage insurance premiums or PMI
to pay,” according to VAloans.com.
Con: They’re not
available to the general public, and veterans must meet a list of
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