Picking the right mortgage has a huge impact on the home buying process. With so many options, it can be difficult to choose the right one. Even common mortgage options are varied. There's something out there for everyone. Knowing what type of loan is best for you can save a lot of stress and money in the long run.
What's an adjustable-rate mortgage?
An adjustable-rate mortgage is a home loan where the interest rate isn't fixed and can change over time. According to Investopedia, the interest rate is fixed toward the beginning of its lifetime. Over time, the interest rate changes at certain intervals. The changes are determined by the terms and the loan's interest rate index.
Also known as a variable-rate mortgage, an adjustable-rate mortgage has different caps to keep the interest and loan payments within a certain range. There are also caps on how many times the interest rate can change.
Pros and cons of an adjustable-rate mortgage
There are a few pros to consider when choosing an adjustable-rate mortgage. There are caps on certain aspects of the loans. Since the interest rate is adjustable, the rate can decrease.
There are also some negatives with an adjustable-rate mortgage. The loan interest could increase and you could face a penalty for selling or refinancing, which makes it difficult for individuals who plan on moving within a few years.
Also, interest rates for these kinds of loans are lower than many other kinds of loans at the beginning of their lifespan. An adjustable-rate mortgage offers the most flexibility out of the options discussed in this article.
What is a fixed-rate conventional loan?
A fixed-rate conventional loan is the opposite of an adjustable-rate loan. The interest rate stays the same throughout the loan's lifetime. These loans usually come in 15-year to 30-year terms, according to Bank Rate. A fixed-rate conventional loan can be a good option for people who plan to live in a home long term.
Pros and cons of a fixed-rate conventional loan
One of the pros of a fixed-rate conventional loan is that it’s fixed. You don't have to worry about rates changing. You always know what you have to pay and you can plan ahead and put the right amount of money aside for each payment period.
On the negative side, because fixed-rate conventional loans are long term, they aren't a good option for someone who wants to relocate in a few years. Also, the longer the life of the loan, the more time you will be paying interest on that loan. Fixed-rate conventional loans are also usually given to people with higher credit scores.
What is an FHA loan?
According to the Department of Housing and Urban Development, loans from the Federal Housing Administration (FHA) are backed by the government. They are designed to help people who have a more modest amount of money to invest in a home.
What are the pros and cons of an FHA loan?
FHA loans are the most accessible. The down payments can be as low as 3.5 percent of the purchase price. You can still apply for these kinds of loans with a higher debt-to-income ratio. Individuals with lower credit scores can qualify for FHA loans.
However, the housing options are restrictive with an FHA mortgage. According to Lending Tree, the homes have to meet certain health and safety standards, which could mean that fixer-upper homes might not qualify for an FHA loan.