The Different Types of Home Financing
One of the aspects of home buying that many people find overwhelming is home financing. Unless you’re planning on buying a house with cash you’ll need to secure some kind of financing for your home. Because a home is such a big purchase choosing the right type of financing is important.
If you choose well you can save tens of thousands of dollars in interest and fees over the course of the mortgage. Let’s take a look at the most common types of home financing to help you decide which type of home financing is right for you.
Different Types Of Mortgages
There are many different types of mortgages that are designed to meet the needs of home buyers across all walks of life. But the most common types of mortgages that people use to buy a home are conventional mortgages and government-backed mortgages.
Conventional mortgages are just mortgages that are not guaranteed by the government. And government-backed mortgages are just like they sound- guaranteed by the government. FHA home loans, VA home loans, and USDA loans for rural properties are all government-backed mortgages. Most people choose conventional mortgages like:
30 Year Fixed Rate Mortgage
A 30-year fixed rate mortgage is the most common type of mortgage that home buyers choose. A 30-year fixed rate mortgage means that you will pay back the home loan over the course of 30 years and that the interest rate will stay the same throughout the life of the loan.
The primary reason why most home buyers choose a 30-year fixed rate mortgage is knowing that the monthly payment amount will stay the same for the course of the loan. It’s much easier for buyers to budget when they know that the amount they are paying each month for their home will stay the same. But that’s not the only benefit to a 30-year fixed rate mortgage.
Another benefit to choosing a 30-year fixed rate mortgage when buying a home in the D.C. area is that the interest rate will stay the same. If there is a jump in interest rates a home buyer with a fixed rate mortgage won’t see any increase in their monthly payment. That can save home owners tends of thousands of dollars in interest costs over the length of the mortgage.
A 30 year fixed rate mortgage might not be the right mortgage for every home buyer. If you’re planning on staying in the D.C. area for less than 30 years, or if you want to pay off your mortgage faster but still want the advantages of a fixed rate mortgage you can choose a 15-year fixed rate mortgage.
15 Year Fixed Rate Mortgage
With a 15-year fixed rate mortgage home buyers get all the same benefits as they would with a 30-year fixed rate mortgage but the payment will be slightly higher because the loan will be paid off in 15 years. The 15-year option has one additional benefit – homeowners will build equity in the home faster than they would with a 30-year mortgage.
If you’re buying a starter home in the Washington D.C. area or you want to build equity quickly so that you can make upgrades to the home, or you want to be able to use the equity in your home for other purposes then a 15-year fixed rate mortgage is a great option. Your Washington D.C. realtor can help you decide whether a 30-year or 15-year fixed rate mortgage is the best option when you’re buying a new home.
Adjustable Rate Mortgage
An adjustable-rate mortgage is also an option when you’re financing a new home. When you use an adjustable-rate mortgage your mortgage cost will increase or decrease based on the current interest rates at set points. That means your monthly payment could go up or down based on the interest rates.
Typically, there is a short period at the beginning of the mortgage term where the rate stays fixed. The monthly payment during the fixed period is often lower than the payment would be with a fixed rate mortgage.
This gives new homeowners the chance to get settled in the home and have some stability in their payment amount. The fixed rate period of an adjustable-rate mortgage could be 2 years, 3 years, 5 years, or more. But most adjustable-rate mortgages have a fixed rate period of either 3 or 5 years.
After the fixed rate period the amount of the monthly payment could increase based on the current interest rate. And in some cases it could increase quite a bit, although there are caps designed to keep the amount from becoming outrageously high. And if interest rates have decreased the amount of the monthly payment could decrease.
But choosing an adjustable-rate mortgage means that you don’t have the certainty of knowing what your monthly mortgage payment will be past the fixed rate period. So why do homebuyers in D.C. choose adjustable-rate mortgages? There are some situations where an adjustable-rate mortgage is a better deal financially for home buyers.
If you’re in the miliary, government, or another line of work where there is a high probability that you’re going to get transferred or need to move within the fixed rate term of the mortgage you could save a lot of money by choosing an adjustable-rate mortgage. You will pay a lower amount monthly and still have a fixed payment amount. If you sell the home before the fixed rate period is up you won’t have to worry about the monthly payment amount going up.
And if your plans change and you decide to stay in the D.C. area you may be able to refinance your home and switch to a fixed rate mortgage to avoid the uncertainty of the adjustable-rate mortgage after that initial period.
FHA Mortgage
FHA mortgages are government-backed mortgages. They are issued through a lender that is approved by the Federal Housing Authority. In order to be eligible for an FHA mortgage you will have to meet requirements that are set by the government.
But, the requirements are often much less stringent than the requirements that are set by private lenders. The FHA home loan program was created to make home buying more accessible to low-income people and people with bad credit. So the credit score required for an FHA loan and the down payment amount required are lower. If you thought that buying a home was out of your reach because you don’t have 20% to put down on a new home or because your credit isn’t perfect you may qualify for an FHA loan that will make it possible for you to buy a home in Washington, D.C.
However, home buyers who use FHA home loans will have to pay a higher interest rate than the current market rate and they are required to buy private mortgage insurance.
In order to be eligible for an FHA home you need to have a credit score of at least 500. If your credit score falls between 500 and 579 you will be required to put down a 10% down payment. If your credit score is 580 or more then you are only required to put down aa 3.5% down payment. There are also grands available to help you pay the down payment amount.
If you’re just starting out and you want to buy your first home, or if you’re starting over after a divorce or life changing event an FHA mortgage can be a great option for purchasing a new home.
VA Mortgage
Active duty military members or any prior servicemembers who met the time requirements to qualify for a VA home loan can use their VA loan benefit multiple times to buy a home. Access to a VA home loan is a benefit earned as part of the compensation of serving in the military.
Similarly to the FHA home loan the VA home loan is guaranteed by the government but the loan is not issued through the government. You will need to work with an approved lender to get a VA home loan.
But, if you are using a VA home loan to buy a new home you don’t need to put down any down payment in most cases. The lender that you go through may require some day payment, but the VA does not.
You also don’t need to carry private mortgage insurance. But you will need to have credit score determined by the lender, usually 650 or higher.
A VA home loan can only be used to purchase a home that you intend to live in as your primary residence. You can’t buy a vacation home or an investment property unless it’s a property that you intend to have as your permanent residence.
Helping You Choose The Right Financing
Buying a home in Washington D.C. and making sure that you choose the right financing can be a confusing process. But you don’t have to go through it alone. We are experts in Washington D.C. real estate and we can work with you to help you find the right house for you and your family and the right financing to pay for it. Contact us today!
Sources:
https://www.investopedia.com/mortgage/mortgage-guide/how-to-choose-best-mortgage/
https://www.nerdwallet.com/article/mortgages/types-of-mortgage-loans