Before you apply for a mortgage to buy your dream home, it is necessary to consider all the options. While getting a loan sounds easy on paper, the actual process is a complicated one, and all financial things, including your credit score, are extremely important. The best idea would be to contact a broker, who can offer insight on what kind of mortgage works best for your situation, but some initial research always helps. In case you are wondering what are the different mortgage types, we have an outline that can come in handy.
Fixed vs. Adjustable Rate mortgages
All mortgages fit into either fixed or adjustable rate category, although it is possible to have a hybrid setup. Fixed-rate mortgage loans, as the name suggests, has a fixed interest rate for the entire term of the mortgage. To be more precise, your monthly payment for the loan remains the same. On the other hand, Adjustable-rate mortgage loans (ARMs) have flexible rates that change with time, typically every year. ARMs may have an initial fixed rate for a specific period, after which the rates will change, and that’s called a hybrid mortgage. It depends on your financial situation as what works best for your requirements. ARMs have a few pros and cons, which must be considered. For example, the initial rate is low, but the flexible rate system does add certain level of uncertainty to the mortgage later.
Conventional mortgage vs. government-insured mortgage
A conventional home loan is a regular mortgage that’s not insured by the government. On the other hand, government-insured mortgage is insured or provided by the government. For example, FHA Loans come under Department of Housing and Urban Development (HUD), and the initial down payment is pretty low on this one. Military service members have the choice of VA loans, while USDA loans are offered to those who want to buy a residence in recognized rural areas. Loans that are offered or insured by the government do have a few pros and cons. A good example of that would USDA loans, which allows you to buy a home, but you cannot use the house to gain rental income – It must be your primary residence.
Don’t forget to consider all your choices before you think of a mortgage. There is nothing called a ‘perfect’ mortgage, and prospective homeowners need to do the initial homework. Consider getting pre-approved for a loan, if you are going for the conventional choice. It is also a good idea to keep a tab on your credit score for at least a couple of years before you apply for a mortgage. There are online guides on things that must be checked before applying for a mortgage, so check for that. Also, experts recommend avoiding other loans for some time before applying for mortgage, which is because it can affect your debt to income ratio – An aspect that lenders always look into.
Check online now to find the detailed pros and cons of mortgages available.