Buying a home doesn’t have to be like pulling teeth. There are many different types of home loans designed to help you finance your next big move, but it can be difficult to get past some of the financial and legal mumbo-jumbo.
Once you get a grasp on home mortgage terms, however, you’ll find they’re easy to understand. Here are the differences between — as well as some of the advantages and disadvantages of — options available with various types of home loans.
Fixed vs. Adjustable Rate Loans
- Fixed rate mortgages come with a set and stable monthly payment plan that stretches out over a designated period of time: most commonly, 30 years, but sometimes 15, 20, or even 40 or 50. The advantage here is that you know exactly what you’re signing up for. The disadvantage is that, even if average rates decrease, you’re stuck with the same rate for the duration of your mortgage.
- Adjustable rates, on the other hand, change from year to year depending on the market index. Initial payments tend to be lower, but the risk is that you could see your home loans rates increase by as much as 6%. This option is usually better for people with short-term plans who won’t necessarily stay in one home for decades on end.
Choosing between fixed and adjustable rates depends on both your situation and the economic climate. In 2012, long-term mortgage rates fell to just 3.3%, which put fixed-rate buyers at a serious advantage. As soon as you’re comfortable with the numbers, it’s important to lock in a rate as soon as possible.
Conventional vs. Government Loans
- Conventional loans are those simply issued by standard mortgage companies. They’re “conventional” compared to government-backed loans, which are federally insured.
- FHA home loans are from the Federal Housing Administration, which allow buyers to make down payments of as little as 3.5% with a 620 credit score (conventional loans typically require 680 or higher). The offset is that you’ll also need to purchase additional insurance on your loan.
Both conventional and FHA loans can be negotiated as fixed or adjustable. Both types of home loans in both categories can be mixed and matched to suit your needs and get you in your home as painlessly as possible.