6 Types of Home Loans: Which One Is Right for You?
We at Dwell Home Team believe that home-buying is one of the most exciting and thrilling experiences in life, and our goal is to make the process as fun and effortless as possible at every turn. One of the initial ways we like to cater to our clients is to dial in their financing strategy before we begin shopping together. We’re lucky to have partnered with the absolute best financing professionals throughout the Greater Seattle-Tacoma area who are experts dedicated to customizing an optimized budget for all of our clients, regardless of income and what’s in the piggy bank.
This can be achieved with many different strategies, all of which require one of six different types of home loan. Depending on where you live, how long you plan to stay put, and other variables, can make home loans better suited to your circumstances and save you the most money on down payment, fees, interest, etc. Of course, to save you the time and energy of researching these (trust us, there’s a lot of confusing information on the internet!), we’ve compiled a list here to describe the characteristics of each to give you a general idea of how each loan works, and which might be the best fit for you and your family.
1) Fixed-rate loan
The most common type of 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.
Right for: Homeowners who crave predictability and aren’t going anywhere soon. You pay X amount for Y years — and that’s the end. The rise and fall of interest rates won’t change the terms of your loan, so you’ll always know what to expect. That said, they’re best for people who plan to stay in their home for at least a good chunk of the life of their loan; if you think you’ll move fairly soon, you may want to consider the next option.
2) Adjustable-rate mortgage
ARM loans offer interest rates typically lower than you’d get with a fixed-rate loan for a period of time — such as five or ten years. But after that, your interest rates (and payments) will adjust, typically once a year, roughly corresponding to current interest rates. So if interest rates shoot up, so do your monthly payments; if they plummet, you’ll pay less. Although much more regulated now, these type of loans were one of the concerns leading up to the 2008 crash, so beware!
Right for: Home buyers with lower credit scores. Since people with lower credit are typically offered higher interest rates on fixed-rate loans, an ARM can nudge those interest rates down enough to put homeownership within easier reach. These 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 (we’re looking at you, home flippers!).
3) FHA loan
Similar to a fixed-rate loan, Federal Housing Administration loans are ideal for those with limited savings buying for the first time (we’ve all been there!). Usually conventional loans require a 20% down payment, but FHA loans can be granted with as little down as 3.5%. Crazy, right?! What’s even better? Washington State and several counties and municipalities offer 0% loans on down payments up to 4% of the purchase price, meaning you can get in the door virtually free!
Right for: Home buyers with limited savings for a down payment. These loans come with several caveats. Loan amounts are limited to certain amounts depending on city, county, and state, and buyers are also required to pay mortgage insurance — either upfront or over the life of the loan — which hovers around 1% of the cost of your loan (but can be refinanced once 20% of your loan has been satisfied).
4) VA loan
If you’ve served in the United States military, a Veterans Affairs loan is an AWESOME alternative to a traditional mortgage, often saving vets tens of thousands over the course of their loan. If you qualify, you can score an amazing home with no downpayment, stellar interest rate, and even better, no monthly mortgage insurance!
Right for: Veterans who’ve served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves. VA loans can be granted more than once (contrary to popular myth), and if you’re developing a real estate portfolio, each home you’re planning to transition from can be rented and refinanced with a conventional loan so that your VA loan benefit becomes available for the next purchase. #NoDownPaymentsEver!
5) USDA loan
USDA Rural Development loans are designed for families in rural areas (although, you’d be surprised what is considered rural in Pierce, King, and Kitsap counties!). The government finances 100% of the home price – meaning no down payment – and offers discounted interest rates to boot.
Right for: Families in “rural” areas with limited financial means. These loans are designed to put homeownership in their grasp. The catch? Your debt load cannot exceed your income by more than 41%, and, like the FHA loan, you will be required to purchase mortgage insurance (until you’ve satisfied 20% of your loan obligations).
6) Bridge loan
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 into one payment; once your home is sold, you pay off that mortgage and refinance.
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.
Too much to take in? Don’t worry! As we mentioned above, it’s our job (and PASSION!) to connect you with the most amazing financing teams in town, and to best advise you based on you and your family’s goals and future plans.
Call or message us today if you’ve been thinking about buying in the King, Pierce, or Kitsap areas, and we can discuss your thoughts and ideas, and help support you through the buying process!
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