Do you dream of owning your own home like every American does? If yes, you can take a mortgage home loan and proceed to make your dream become a reality. The lenders offer a wide variety of home loans, with different terms and conditions. If you have some prior knowledge of each type, you can save a lot from your hard earned income.
Different types of home loans
Basically a home loan can be a government loan or a conventional loan. The various types of home loans which are offered by the lenders are mentioned below:
1. Government loans:
* FHA loans: This type of loan is generally guaranteed by the government. If you are unable to make a 20% down payment of the total loan amount, you can opt to take this loan. The loan term generally is from 10 to 30 years. The government gives guarantee to the lenders of repaying the loan amount, in case you fail to repay. So, the interest rate is also lower than that of the conventional loans. You need to have good credit report to take advantage of this loan type. The interest on this loan can be a fixed rate or an adjustable rate.
* FHA HUD loans: This type of loan is for those home buyers who want to buy an FHA foreclosure house. You need to put a minimum down payment, the amount can be as low as $100 and a small amount towards repair escrow, if the home you intend to buy needs repairing. You may get assistance upto $2,500 towards closing costs. It is a fixed rate mortgage and the loan term can be from 10 years to 30 years.
* RHS loans: This loan type is guaranteed by the US Rural Housing Service and only the people of rural area can take advantage of this loan. It has zero down payment facility and other costs towards the loan processing are also very low.
* VA loans: You can take advantage of this type of loan if you are a military veteran and you have been discharged with “honor†status. The most advantageous feature of this type is that, you do not have to make any down payment to take this loan and the interest rate will be 1% less than the existing market rate. You need to pay a funding fee of 1% at the time of closing of the loan process. The property and insurance taxes will be factored into an escrow account, so that you can make a monthly payment that is affordable to you.
1. Conventional loans:
In general, if you apply to take a conventional home loan, along with other factors, you need to have a very good credit score, to be eligible for the loan. You need to make a down payment of 20% of the loan amount. If you are unable to make 20% down payment, you need to do private mortgage insurance (PMI), for your lender. If your credit score is excellent, you may get a lower interest rate.
The most common conventional loans are:
* Fixed rate mortgage: In this type of loan the interest rate remains fixed over the full loan term. The loan term generally ranges from 5 years to 30 years, but, most borrowers prefer a 15-year or a 30-year loan term. If you go for a 30-year loan term, the interest rate will be lower than that of a 15-year.
* Adjustable-rate mortgage: If you opt to go for this loan type, you will get a lower interest rate for an initial period and after that the rate will fluctuate according to the market index. The initial period of the loan can be fixed by you which ranges from months to years. You need to specify the initial period when you take the loan.
* SPARC: This loan is provided by the Sponsoring Partnership and Revitalizing Communities. They offer this loan through the nonprofit organizations, housing authorities, local government, etc. These are for the first time home buyers. The organizations combine the various loans offered by the federal, state and local government.
* USDA loans: This loan is offered to the residents of rural areas or a town, where the maximum population does not exceed 10,000. You may get a 102% financing on your home. You need not have to make any down payment to take the loan and moreover, you will also not have to pay any monthly fee towards mortgage insurance. The loan term generally ranges from 15 to 30 years. However, the interest rate is usually 1% higher than the current market rate.
* Balloon loans: These types of loans are short term loans and the loan term ranges from 3 to 5 years. You need to make a fixed monthly payment and at the end of the term you have to pay the outstanding loan amount in a lump sum. The interest rate on this type of loan is generally lower than that of a 15-year or 30-year loan. The most popular loan terms for a balloon loan are 5/25 balloon and 7/23 balloon. At the end of the loan term if you want to opt for a refinance, you do not have to be requalified to get the loan.
* Jumbo loans: If the amount of loan you want to take exceeds the maximum loan amount, as set by Freddie Mac and Fannie Mae, you have to take a jumbo loan. It comes with a higher interest rate than the usual conforming loans.
* Line of credit home loans: You can take this loan against the equity you have built up on your home. Every month the loan balance will be reduced by the amount of cash coming into the account. However, the balance needs to be regularly reduced, or else, the loan becomes very much costly.
While taking the loan, you should also keep in mind that you need to pay extra money towards loan origination fees, closing costs, appraisal costs, title transfer fees, etc, along with the down payment. So, you need to select a loan, with such terms and conditions that will suit your pocket the best.