Saving Money Blog

Finance Blogs » Saving Money » 3 loans for your next home purchase

3 loans for your next home purchase

By Kemberley Washington · Bankrate.com
Sunday, June 29, 2014
Posted: 6 am ET

Before purchasing a home, it's important to explore the different types of loans available to you.  Understanding which loan fits your needs can help reduce unnecessary costs.

Following are three options when searching for a home mortgage. However, remember that loans come in many flavors. So, it's a good idea to speak with your lender, who can help you zero in on the loan that's best for your needs.

FHA home loan

A Federal Housing Administration loan is a loan insured by the federal government against defaults. The government insures FHA loans to reduce the lender's risk in case the borrower does not repay the loan.

Generally, it's easier to qualify for an FHA loan than it is for some other types of loans. FHA loans:

  • Typically are available with a low down payment.
  • Do not require a borrower's credit score to be perfect.
  • Often are a great choice for first-time homebuyers.

An FHA loan has many advantages. However, borrowers are required to pay mortgage insurance premiums to help protect the lender in the case of a default.

Conventional fixed-rate loan

Another type of loan is a fixed-rate loan offered by a private lender. Typically, these fixed-rate loans are called conventional loans. This type of loan requires buyers to:

  • Provide a bigger down payment, often between 5 percent and 20 percent.
  • Have stronger credit than required for an FHA loan.
  • Be able to document income and assets.

Borrowers usually must have more cash reserves to qualify for a conventional loan compared with an FHA loan. In addition, borrowers must be able to verify income through W-2 statements, bank statements, tax returns and other financial documents.

Adjustable-rate mortgages

An adjustable-rate mortgage, or ARM, typically begins with a fixed rate for a period of time. This rate is often lower than rates charged by typical fixed-interest loans.

However, over time, payments may increase. Rates on ARMs typically reset at a predetermined date. For instance, a 5/1 ARM means that the payments will remain the same for the first five years, before payments begin to adjust annually thereafter.

The new rate could go up or down, depending on what happens to the index to which the loan is tied. Many ARMs have lifetime caps that limit the amount a rate can rise over time.

Kemberley Washington is a certified public accountant and professor at Dillard University in New Orleans.  She writes a personal finance blog at Kemberley.com.  Follow her on Twitter @kemwashcpa.

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
2 Comments
Add a comment

(Comments may take 5-10 minutes to appear)