When you decide to buy a house, you may find that there are VA home loans, FHA loans and other types of home loans that may apply to you. Fortunately, while there is great diversity among the numerous loan products on the market, the majority of loans fall with a handful of primary categories Understanding the primary benefits and drawbacks of these categories can help you quickly and easily remove options that are not right for you and find the best funding for your needs.
Deciding on Mortgage Options
To make important decisions between options, such as a fixed rate mortgage, a flexible rate loan or a government-guaranteed mortgage program, you must make a few key decisions. Ask yourself:
- How much money do you have to spend on a mortgage per month?
- How much money do you have available to put toward a down payment?
- Do your employment and family situations allow you to commit to staying in a home for several years, or is there a chance you will need to move on short notice?
- How comfortable are you with change and risk?
Once you have determined your answers to these questions, you are ready to start looking at mortgages.
VA Home Loans
VA home loans are mortgages or other home-related loans available to homeowners from private lenders that are guaranteed by the VA. With the VA backing these loans, lenders are willing to make them available to homeowners at excellent terms, which often include no down payment requirements and low interest rates.
Applicants for VA home loans must be active United States military servicemembers, veterans or the qualifying surviving spouses of the same. They must have decent credit, and be able to prove, at the time of purchase, that they have incomes sufficient to support the projected monthly payments. Funds can only be used on properties that the applicants will live in as their primary residences.
VA mortgages and loans can be used for certain purposes. These include the:
- Purchase or construction of a home or condo.
- Renovation of a home.
- Energy-efficiency improvements and upgrades to a home.
- Process of mortgage refinancing.
There are certain available forms of such loans. These include:
- Purchase Loans.
- Interest Rate Reduction Refinance Loans (IRRRL).
- Native American Direct Loans (NADL).
- Adapted Housing Grants.
Limitations and stipulations to these types of home loans apply, however. Homes and properties must meet minimum VA standards, or plans to bring the homes up to those standards must be included in the purpose and total cost of the loan. Moreover, the VA will not provide funds beyond the assessed market value of any home. Applicants who wish to purchase a home at a price above that amount must provide the difference between the assessed cost and actual cost on their own.
Launched in 1934, the federal FHA loans program has a long history of helping first-time homebuyers and other households with barriers to homebuying acquire safe, sanitary and appropriate housing. The program focuses on enabling prospect homebuyers to obtain mortgages with low down payments and minimal closing costs.
In some cases, homeowners can access FHA loans with rates equivalent to less than 4 percent of their homes’ total purchase prices. Additional specialty funding options may be available for seniors 62 years of age and older.
HUD’s FHA program offers home improvement loans, in addition to mortgages, enabling applicants to acquire much-needed funds for energy efficient renovations and other projects. Unlike many programs, FHA does not discriminate against mobile homes and other forms of manufactured housing, giving applicants the widest possible range of opportunities.
Conventional loan rates are typically higher than government-subsidized loan program rates. This is because lenders have no backing or guarantee of repayment, except from the buyer. As a result, borrowers can expect to need better-than-average credit and solid down payments, in order to qualify.
Under conventional loan requirements, you can expect to need mortgage insurance, if you make a down payment on your home that is less than 20 percent of its total value.
While these loans come in many variations, one particular type is worth special attention. A balloon mortgage is a loan in which borrowers pay the same amount of money for most of their loan term. At, or near, the end of their term, however, they are charged higher payments or “balloon payments” to finish off the total repayment.
Balloon payments can be three or more times the size of a standard payment. So, for instance, if your usual mortgage payment is $1,200 a month, you might face balloon payments of between $5,000 and $10,000.
Some homeowners find these types of home loan terms desirable, because they allow them to make lower payments in the early years of their loans. Often, homebuyers assume that they will be more financially stable or have higher incomes by the time the larger payments become due, easing the financial burden. While this can be true, it is important to take steps from the beginning, in order to ensure you will be able to make your balloon payments. Otherwise, you risk losing your house and ruining your credit when they become due, if unexpected circumstances or changes to the housing market fail to place you in the comfortable financial position you had hoped to achieve by that time.
Fixed Rate Mortgage Loan
A fixed rate mortgage is any home loan in which the interest rate does not change over time. So, for instance, if you agree to an 8 percent interest rate on your mortgage at the time of signing, you will continue to pay 8 percent for the life of the loan, regardless of whether the market rate increases or decreases during that time.
The primary benefit of fixed rate mortgages is predictability. No matter what else changes in the marketplace over the lifetime of your loan, you will always know exactly how much you owe each month. You also know at the beginning of your commitment the total amount you will owe each year and from start to finish.
This allows you to plan accurately, and ensure that you are able to always make your payments. It also enables you to easily pay off your loan early, if you wish, and to automate payments with security and comfort.
Adjustable Rate Mortgage (ARM)
An ARM mortgage, or Adjustable Rate loan, is essentially the opposite of a fixed rate loan. When you sign for an ARM, you agree to pay the base loan amount. You also agree to pay interest on the loan with the understanding that the interest rate can, and will, change over time.
In some cases, your interest rate will be locked at a certain level for a set period of time before it changes. For instance, your initial rate might be 4 percent for the first three years of your loan. In the fourth year, then, your interest rate could change.
Typically, during the adjustable rate period of your mortgage, your interest is tied to the general interest rate market, or index. When interest rates overall go up, so will the rate applied to your mortgage. If interest rates as a whole go down, your interest rate will, as well. Your contract may or may not specify minimum and maximum interest rate caps for your loan.
The appeal of ARM mortgages is that if interest rates go down after you purchase your home, you will not be locked into paying higher rates, and will benefit from that drop by saving money. The risk of these loans is that if interest rates increase over time, you could end up paying significantly more for your mortgage than anticipated, creating undue financial burden.
ARMs can also be more difficult for which to appropriately plan, as they change over time, due to factors that cannot always be accurately foreseen or predicted.