What Type of Loan Program Should I Choose?

It’s time to purchase a home. What type of loan should you apply for? Should you get a fixed-rate or adjustable rate mortgage, a conventional loan, or a government loan? Deciding which mortgage is best depends largely on your unique circumstances. This article helps you know the different types of loans, so you know which is best for you.

The Difference Between a Home Loan and a Mortgage Loan

The terms home loan and mortgage loan are often used interchangeably, but there is a difference. Here is a short definition of each to help you know which kind of loan you are looking for.

What Is a Home Loan?

Home loans are only for purchasing or building a home. That home is used as collateral. So, if you default on the loan by failing to make payments, the lender takes possession of the property and sells it to recoup their losses.

What is a Mortgage Loan?

A mortgage loan also uses the property as collateral, but, in this case, you can use the loan in any way you wish. It can be used to build or purchase a house, make repairs to a house you already own, build a garage, or even take a vacation. But, just like the home loan, if you default, the property goes to the lender.

How Many Kinds of Mortgage Loans Are There?

There are more types of loans to choose from than you are most likely aware of. Here is a brief overview of some of your options at MortgageWorks:

• Fixed Rate Mortgages (FRM) The most common type of loan option, the traditional fixed-rate mortgage includes monthly principal and interest payments, which never change during the loan’s lifetime.
• Adjustable Rate Mortgages (ARM) Adjustable-rate mortgages include interest payments that shift during the loan’s term, depending on current market conditions. Typically, these loans carry a fixed-interest rate for a set period before adjusting.
• Hybrid ARMs Hybrid ARM mortgages combine features of both fixed-rate and adjustable rate mortgages and are also known as fixed-period ARMs.
• FHA Loans FHA home loans are mortgages insured by the Federal Housing Administration (FHA), allowing borrowers to get low mortgage rates with a minimal down payment.
• VA Loans VA loans are mortgages guaranteed by the Department of Veteran Affairs. These loans offer military veterans exceptional benefits, including low-interest rates and no down payment requirement. This program was designed to help military veterans realize the American dream of home ownership.
• Interest Only Mortgages Interest-only mortgages are home loans in which borrowers make monthly payments solely toward the interest accruing on the loan, rather than the principle, for a specified period.
• Balloon Mortgages Balloon mortgages include a note rate that remains fixed initially, and the principal balance becomes due at the end of the mortgage term.
• Graduated Payment Mortgages Graduated Payment Mortgages are loans in which mortgage payments increase annually for a predetermined period (e.g., five or ten years) and become fixed for the remaining duration of the loan.

What Is the Best Type of Loan to Buy a Home?

These are the most popular types of loans from the list above:

Fixed Rate Mortgage

Fixed-rate mortgages are the most popular of all the mortgage loan types. They generally come in two term lengths, 10-year and 30-year. And, as the name suggests, your interest rate will not change during the term of your loan. 

This does not mean your mortgage payment will always be the same every month. If you put down less than 20% of your down payment, you need to pay a mortgage insurance premium until the 20% mark is reached. Some lenders also collect every month for your annual property taxes and insurance.

Adjustable Rate Mortgage

An adjustable-rate mortgage has a fixed interest rate for a predetermined amount of time, and then the interest rate can go either up or down depending on the market. This interest rate will continue to adjust at regular intervals during the loan term. 

Usually, the initial interest rate for this type of mortgage is lower than a fixed-rate mortgage. This gives you more money toward your home purchase. However, even though there can be a cap on how high the interest rate can go, your interest rate could rise significantly.

FHA Loans

You might want to consider a federally-backed loan if you have a low credit score. These Federal Housing Authority loans are insured by the government.

That means the government will pay the lender should you default on your loan. This creates less risk for the lender and, therefore, the ability to get a loan with a low credit score. You need to meet certain criteria to qualify for FHA loans.

VA Loans

Just like FHA loans, VA loans are insured against default by the federal government. The difference is that VA loans are specifically for veterans and their families. 

It is a way for the United States to honor those who have chosen to commit themselves to the protection of our country. 

Conclusion

Because of the number of loan types available, it is very important to talk to your lender to determine which type of loan is best for your financial circumstances. Your lender will want to know your income, assets, amount of debt, credit score, and the type of property you are looking to purchase.

For personalized help deciding on the loan best for you, contact MortgageWorks today.

MortgageWorks offers financing for new home purchase, refinance, home equity, investment property, construction and a wide variety of loan program options to fit your every need.

Servicing the state of California and the entire Coachella Valley, including Palm Springs, Cathedral City, Rancho Mirage, Indian Wells, Palm Desert, Desert Hot Springs, La Quinta, Indio and Coachella. Call Art today @ (760) 883-5700

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.