How to Figure out Which Home Loan is Right for You
Choosing the right home loan is a hugely important step in your home buying process. The right loan can save you thousands over the life of your mortgage, while other loans may end up costing you thousands, and even cause you to end up “underwater”. So, how do you find the home loan that’s going to be best for you?
First, talk to your financial advisor and ask them which kind of loan will be best for you. If you don’t have a financial advisor, ask your ZipRealty Realtor for a recommendation, or ask other buyers in your area by posting on the ZipCommunity.
Next, get preapproved by a reputable lender.
There are a wide variety of loans – below is a brief overview of the main ones.
Home Loan Overview
FHA Loans are insured by the Federal Housing Authority and require a small down payment, typically in the 2.5 to 5 percent range. There are no income limits; however there are limits on how much you can borrow. Typically an FHA mortgage loan will be relatively small compared to home prices in your area.
VA Fixed Rate Loans
These loans allow veterans to purchase homes without making a down payment, and are guaranteed by the Department of Veterans Affairs. Like other fixed-rate loans, you “lock in” the interest rate for the lifetime of the loan.
These loans generally require higher down payments than government guaranteed ones – sometimes up to 20%. You'll likely need excellent credit to qualify for a lower interest rate, and will need to have cash-in-hand for the down payment.
Fixed rate loan
With a fixed-rate loan, you “lock in” the interest rate for the lifetime of the loan. This is typically a good idea if interest rates are low and you’re not going to move or refinance soon.
Adjustable rate loan
With an adjustable rate mortgage (ARM), the interest rate on your loan adjusts up and down, depending on the index the rate is tied to. If interest rates go up, your mortgage payments will go up. Conversely, if interest rates go down, your mortgage payment will go down. If interest rates are currently high, you might consider starting off with an ARM and refinancing to a fixed-rate loan once they drop.
Some loans are fixed for a period of time, say 5 or 10 years, then adjust like an ARM based on an interest rate index. If the current interest rate is favorable and you plan to move or refinance during the fixed rate period, this type of loan might be a good option for you.
Some conventional loans require that you pay “points,” which is basically prepaid interest on your loan. By paying some interest upfront you can pay a lower interest rate on the remaining part of the loan. If your loan requires you to pay points, you will have to pay it at closing, along with your down payment, title insurance, taxes (if applicable) and other fees.
Conventional loans have maximum loan limits based on the area you’re buying in, up to $729,500 for the most expensive cities. If you need to borrow more than these limits, you’ll need a jumbo loan. Jumbos generally have higher down payment requirements – sometimes higher than 20% -- sufficient assets and excellent credit. Interest rates on fixed or adjustable jumbo loans are generally higher than conventional loans with comparable terms.