In 2022, the average American home costs $348,000. Although you may be able to afford that price, it might be overwhelming in one payment. That’s why home loans play a significant role in paying for your home.
Once you find a house, you can work with a lender to break your monthly payment into affordable sums. But not all home loans are the same. It would help us to consider different loan types to find the best fit for you and your situation.
Keep reading to get an in-depth breakdown of the types of home loans. This way, you can find the best one for your situation.
Fixed-Rate Mortgages
Fixed-rate mortgages are the most popular home loans and are sought after by many homebuyers due to their relative certainty. Fixed-rate mortgages lock in interest rates, and your monthly payments will stay unchanged. It stays the same even if prevailing interest rates move up and down in the future.
Fixed-rate mortgages are typically 30-year loans but can sometimes be as long as 40 or as short as ten years. The help of a fixed-rate mortgage is that you won’t experience any drastic changes in your payment amount, and you can easily plan and budget for your future.
Adjustable-Rate Mortgages
Adjustable Rate Mortgages (ARMs) are famous for homebuyers seeking a lower interest rate. ARMs offer fluctuating interest rates, meaning the payments may rise or fall over time. Borrowers opt for ARMs when they expect their income to increase.
ARMs are more complicated than fixed-rate mortgages. You can look at these finance tips for homebuyers to help you even more while looking at your financing options.
FHA Loans
FHA loans are home loans insured by the Federal Housing Administration. They are attractive due to their low down payment and flexible credit score requirements. It makes them easier to qualify for than other types of home loans.
FHA loans also feature lower interest rates. It is making them more affordable and a good choice for first-time homebuyers that may need help accumulating the down payment required by some traditional lenders.
FHA loans also allow borrowers to receive seller and lender-paid closing costs. This can help cut out-of-pocket expenses when purchasing a home.
Jumbo Loans
Jumbo loans are home loans that exceed the conforming limits set by Fannie Mae and Freddie Mac. Due to the significant loan amounts, these loans generally need a higher credit score, a higher down payment, or a lower Loan to Value ratio.
Interest rates for these loans are generally higher than for conforming loans, and borrowers may be required to give added documentation and verification. Since more paperwork and underwriting are required, borrowers should allow more time to close on a Jumbo Loan, as approval timelines can be longer.
Types of Home Loans for Every Aspiring Homeowner
Home loans are an essential part of buying a house, so it pays to know your options. Many types of home loans are available, each with different terms and interest rates.
We hope this guide has helped you understand the types of home loans and got you one step closer to becoming a homeowner. Why not start looking at ways to finance your dream home today?
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