What Loan Is Right For You?
Fixed-Rate Loan
What it is: A fixed-rate loan is the most common type of conventional loan, a fixed-rate loan prescribes a single interest rate—and monthly payment—for the life of the loan, which is typically 15 or 30 years. One type of fixed-rate mortgage is a jumbo loan.
Right for: A fixed-rate loan is right for homeowners who crave predictability and aren’t going anywhere. For your mortgage payment, you pay X amount for Y years. A fixed-rate loan will require a down payment. The rise and fall of interest rates won’t change the terms of your home loan, so you’ll always know what to expect with your monthly payment.
Adjustable-Rate Loan
What it is: Adjustable-rate loans offer lower mortgage interest rates than a fixed-rate loan for a period of time, usually five or ten years, rather than the life of the loan. After that, the interest rates and monthly payments adjust, usually once a year, to correspond with current interest rates.
Right for: Adjustable-rate loans are for home buyers with lower credit scores. Since people with poor credit typically can’t get good rates on fixed-rate loans, an adjustable-rate mortgage can nudge those interest rates down enough to put homeownership within easier reach. These home loans are also great for people who plan to move and sell their home before their fixed-rate period is up and their rates start vacillating.
FHA Loan
What it is: An FHA loan is government-backed and allows borrowers to put down as little as 3.5% as a down payment, rather than the 20% typically required with conventional loans.
Right for: An FHA loan is right for homeowners with meager savings for a down payment. The FHA has several requirements. First, most loan amounts are limited to $417,000 and don’t provide much flexibility. FHA loans are fixed-rate mortgages with either 15 or 30 year terms. Buyers of FHA loans are also required to pay mortgage insurance, which is around 1% of the cost of the loan amount.
VA Loan
What it is: VA loans are for military veterans and can be an excellent alternative to conventional loans. If you qualify for a VA loan, you can get a nice home with no down payment and no mortgage insurance payments.
Right for: VA loans are for veterans who’ve served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves. Because the home loans are government-backed, the VA has strict requirements on the type of home buyers can purchase with a VA loan: It must be your primary residence, and it must meet “minimum property requirements” (that is, no fixer-uppers allowed).
USDA Loan
What it is: A USDA loan is government-backed and designed for families in rural areas. the government finances 100% of the home price for USDA-eligible homes and offers discounted mortgage rates.
Right for: A USDA loan is right for borrowers in rural areas who are struggling financially. This loan puts ownership in grasp with affordable mortgage payments. Your debt cannot exceed your income by more than 41% and you will be required to purchase mortgage insurance.
Bridge Loan
What it is: Also known as a gap loan or “repeat financing,” a bridge loan is an excellent option if you’re purchasing a home before selling your previous residence. Lenders will wrap your current and new mortgage payments into one; once your home is sold, you pay off that mortgage and refinance.
Right for: A bridge loan is right for homeowners with excellent credit and a low debt-to-income ratio, and who don’t need to finance more than 80% of the two homes’ combined value. Meet those requirements, and this can be a simple way of transitioning between two houses without having a meltdown—financially or emotionally—in the process.