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Once you have a budget in mind for your new house, the next step is to choose the type of mortgage you would like to apply for the transaction. It can be a bit overwhelming for individuals with limited knowledge of the finance industry. The key is to educate yourself about different mortgage options and make a choice afterwards.
What are the different types of mortgage options?
- Fixed Rate or Adjustable Rate Mortgage: A fixed rate loan maintains a fixed interest rate throughout the tenure of the loan. It is the perfect choice when interest rates are lower and it can save significant amount of interest money over a long period. Adjustable rate mortgage are the ones with flexible interest rates and they can change as per the market conditions. These loans are suitable for individuals who are planning to own a house for a short duration.
- Federal Housing Administration Loan (FHA): FHA loans are perfect for individuals with shaky credit history. One can avail these loans with smaller down payments and less stringent credit requirements. Keep in mind that you would have to make monthly insurance payments with an FHA loan. In 2015, Fannie Mae and Freddie Mac lowered the down payment requirements to 3.5% allowing more people to avail FHA loans.
- Government-backed loans or conventional loans: The U.S. government insures government-backed loans and both FHA loans and Veteran Affairs loans fall under this category. Major banking institutions offer conventional loans and the lender assumes the risk of losing money in case of a default. If you are planning for a conventional loan, the lender is likely to ask you for homeowners insurance.
- Conforming or non-conforming loans: Conforming loans are mortgages whose borrowing amount is within the standard limit set by Fannie Mae and Freddie Mac. These loans are available at competitive interest rates and are easy to sell on the secondary mortgage market. Non-conforming loans are the ones that exceed the Fannie Mae and Freddie Mac limits for conforming loans. These loans are somewhat difficult to sell in the secondary mortgage market. The lenders charge higher interest rates for non-conforming mortgages.
After choosing a specific type of loan, ask your lender about pre-payment charges and additional fees associated with the loan. Pay special attention towards bank fees as a slight change in percentage could mean several thousand dollars to you.