- As mortgage rates continue hovering near historic lows, many potential buyers are eager to make a move—but it can be hard to know which type of loan is best.
- There are dozens of different mortgage options available today, and some even have low down payment or credit score requirements. This can help a variety of buyers finally achieve their real estate goals.
- Need help finding a lender or choosing the right mortgage for your needs? We’d be more than happy to offer a few recommendations.
Home Financing 101: The Most Common Types of Mortgages
Let’s face it—understanding mortgages can be the most complicated part of buying a home here in Johnston County. Even experienced buyers sometimes have trouble deciding between lenders or shopping around for the best interest rate. And because there are so many options, it can be difficult to track down the mortgage that best meets your needs.
There are a variety of factors you should consider before committing to a loan, such as your income, debt, financial history, and how long you plan on staying in your new home. But if you play your cards right, you could end up scoring a great deal. Here are some of the most popular types of mortgages, as well as their pros and cons.
A fixed-rate mortgage is the most basic and reliable type of home loan you can get. Your interest rate and monthly payment will stay the same for the entire duration of the mortgage, and you’ll likely have to put at least 20% down and have an established financial history to get approved.
Typically, fixed-rate mortgages are broken down into 15- or 30-year terms. If you want predictability and don’t plan on moving for a while, this is probably the best option for you.
Unlike their fixed-rate counterparts, adjustable-rate mortgages offer the initial benefit of a lower rate and down payment. However, ARMs fluctuate with the market, which means your interest rate and monthly payments could increase or decrease over time.
While there is more risk involved with an adjustable-rate mortgage, it can be worth it if you plan on living in your home for a shorter period of time. Generally, ARMs have a capped introductory interest rate for the first few years, which can save you quite a bit of money compared to a fixed-rate loan.
If you or your spouse are an active, retired, or veteran member of the military, you could be eligible for a VA loan. Backed by the US Department of Veterans Affairs, this unique type of mortgage lets you buy a home with little to no down payment or mortgage insurance.
Because VA loans are guaranteed (but not financed) by the government, they do have stricter requirements than other mortgages. The loan can only be used towards a primary residence, and the house you intend to buy has to meet minimum property requirements. This means you’ll have to undergo additional inspections and appraisals.
Backed by the Federal Housing Administration, the FHA loan is designed for first-time or lower-income buyers. While most mortgages typically require a down payment of 20% or more, the FHA loan allows buyers to put down as little as 3.5%; that equals out to around $9,000 for a $250,000 house.
FHA loans come with a fixed interest rate and can offer a path to homeownership for buyers who don’t have enough saved for a traditional loan. However, you will be required to pay for private mortgage insurance (PMI) every month, which typically costs around 1% of your total loan amount. It’s also important to remember that the government does not issue your loan—you’ll still have to shop around for the right FHA-approved lender.
The USDA loan is a government-sponsored mortgage program that targets buyers in more rural areas. While the USDA does have stricter credit and income requirements than the FHA, they’ll fund up to 100% of the purchase price for an eligible home. That means you won’t have to put any money down, and you may even enjoy a lower-than-average interest rate.
Additionally, USDA loans require mortgage insurance, and you won’t be approved if your debt-to-income ratio exceeds 41%. Before applying, you should also check the USDA’s eligibility map to see if your area qualifies for the program.
This is hardly an exhaustive list of all the mortgages used by today’s home buyers! Depending on your financial situation, you could qualify for a more niche loan, such as a balloon mortgage, bridge loan, or jumbo loan. Many banks, lenders, and state governments also have their own programs or incentives that are worth exploring. You can even combine different types of loans to create a financing plan that’s tailored to your needs.
If you don’t have time to research all of your options, it might be beneficial to work with a mortgage broker or ask your agent for recommendations. They’ll have the knowledge to guide you in the right direction!
Want to Learn More About Mortgages?
If you’re in the market for a new home, our Jaclyn Smith Properties Team would love to discuss your financing options or recommend some top-rated lenders. Contact us today to learn the ins and outs of the Johnston County home buying process, from finding a loan to finally getting the keys to your new place. We look forward to helping you start your next chapter!