Real Estate News

Which Type of Loan Is Best? Were Doing an Apples-To-Apples Comparison.


Written By: Jaymi Naciri
Wednesday, August 21, 2019

30-year fixed-rate conventional

This is a 30-year loan with rates that are fixed every month. These loans follow Fannie Mae and Freddie Mac guidelines and are not backed by the government like FHA loans.

Pro: With set payments, therersquo;s no need to worry about rising rates. Loans are available for a range of buyers, with options like HomeReady andnbsp;Conventional 97nbsp;that offer as little as 3 down. Also, there is no upfront mortgage insurance fee like you have on FHA loans.nbsp;nbsp;

Con: You have to pay PMI if you put less than 20 down. There also may be higher credit score requirements than FHA loans.nbsp;nbsp;

15-year fixed-ratenbsp;

A 15-year fixed-rate option also has fixed rates for the life of the loan. If yoursquo;re the type who wants to pay your home off more quickly, this could be a good choice.

Pro: You pay far less interest over the life of the loan and pay off your home in half the time.nbsp;

Con: Monthly payments are higher.

FHA

FHA loans are federally insured, which is why down payment and credit score requirements are more >

Pro: FHA loans require as little as 3.5 down. Credit score requirements are also lower than conventional loans. You can typically qualify for a loan with a 3.5 down payment at a 580 score, and may be able to get a loan with a score as low as 500 if you have 10 down.nbsp;

Con: Yoursquo;ll have to pay mortgage interest, which you canrsquo;t get rid of unless you refinance. FHA loans also come with an upfront mortgage insurance fee.

Adjustable rate

ldquo;An adjustable-rate mortgage ARM is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan,rdquo; said Investopedia. ldquo;Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly. The interest rate resets based on anbsp;benchmarknbsp;or index plus an additional spread, called annbsp;ARM margin.rdquo;

Pro: Rates are often lower during the introductory or fixed period than what a borrower can get with a fixed-rate loan, making homeownership more affordable initially.nbsp;

Con: Once the ARM gets past the fixed period, monthly payments can skyrocket, leaving owners unprepared and possibly in danger of defaulting.nbsp;

USDA loansnbsp;

Looking to buy in a rural area? You may qualify for a USDA loan. USDA-eligible homes may also be located in some suburban areas. You can check eligibility on their website.nbsp;nbsp;

nbsp;Pros: USDA loans offer low or even no down payments and low interest rates. Rates can be as low as 1 with subsidies on direct loans.

Cons: Household income is capped and anbsp;mortgage insurancenbsp;premium is required for down payments under 20.

VA loans

Veterans Administration VA loansnbsp;help military members and veterans purchase homes.

Pro: VA loans tend to have the lowest average interest rates, and loans are available with no down payment. In addition, there is ldquo;no monthly mortgage insurance premiums or PMI to pay,rdquo; according to VAloans.com.

Con: Theyrsquo;re not available to the general public, and veterans must meet a list of conditions.nbsp;

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