What Are the 3 Main Types of Home Loans?
As a home buyer, knowledge is power, and one of the first questions people ask us is about the different types of home loans.
While most people understand that the interest rates can vary on home loans, they are often unsure of how to sort through the various benefits and drawbacks of each type of loan to find the right one that works for their situation.
These 3 types of home loans help to break down your options so that you have a better idea of what to talk about when you sit down with your loan officer.
Fixed and Adjustable Rate Loans
Out of the 3 types of home loans, understanding the difference between fixed and adjustable rate loans is one of the most important things for you to do as a home buyer.
The main difference between these two types of loans is that a fixed rate loan keeps the same interest rate throughout the repayment period. This means that the monthly payment on your house will never change.
Adjustable rate loans have an interest rate that changes over time. In some cases, this may involve a hybrid type of loan where you begin with a fixed rate and transition to an adjustable one after at a certain time during the repayment period.
While fixed rate loans give you the benefit of consistency, adjustable rate loans have the potential to help you pay lower interest rates during certain points of the repayment period.
Government Backed and Conventional Loans
Conventional home loans loans are those that are not insured by the federal government. While these are harder to qualify for, they may be your best bet if you do not fit the requirements for a government backed loan.
Government backed loans include the following main types, and each one has specific guidelines and benefits that we can help you to understand as you begin the loan application process.
- FHA loans
- VA loans
- USDA loans
Since the government backs these three types of loans, lenders are more likely to approve them for people who are considered to be a higher risk than others.
These may be an option for you if you are a first-time home buyer, have a short or negative credit history or if you need to put down a lower down payment than what is required for a conventional loan.
Jumbo and Conforming Loans
The first thing you need to know about conforming loans is that Fannie Mae and Freddie Mac are two major corporations that are involved with purchasing and selling loans to investors as securities.
Since these government-backed corporations plan to sell the loans on Wall Street, they set specific guidelines that minimize the risks involved.
For you, the most important guideline to be concerned with is the limits that they place on the size of the loan that you can secure.
In today’s housing market, it is possible that you may not find a house with a price that fits within the guidelines set for conforming loans. When this happens, you have the option of using a jumbo loan to secure the financial assistance you need to make your home buying dream a reality.
Non-conforming, or jumbo loans, are provided by lenders who do not plan to see them to investors. For this reason, they typically have more lenient standards regarding limits as well as credit standing requirements.
The type of home loan that you choose affects your financial security and happiness for many years. Let us help you understand the pros and cons of each different type so that you can make the right choice for your future.