Home Loans: Explained

Experts are predicting that 2018 will be another sellers’ market, meaning there are more people who want to buy a house than there are houses for sale. At the same time, mortgage rates are slowly but surely on the rise. All of this means that if 2018 is that year that you find a home you love at a price that fits your budget, it’s a good idea to think carefully about what kind of home loan is right for you. To get your house-owning dreams off the ground, here’s a quick guide to home loans explained.

Two Basic Kinds of Loans

The first things to know about home loans is that there are two basic kinds of loans to choose from – a fixed rate mortgage, or an adjustable rate mortgage. Each offers advantages and disadvantages, and the best one for you depends on your individual financial situation as well as what you’re planning to do with your home.

Fixed Rate Mortgage

Getting a fixed rate mortgage means that when you’re paying back your home loan, your interest rate will stay the same for the entire time that you’re making repayments. With regular, expected, unchanging monthly principal and interest payments, a fixed-rate mortgage lets you benefit from the consistency of knowing how much you owe every month, so you can enjoy the security of having stable payments that will never suddenly increase.

A fixed rate mortgage is a great option for home buyers who are purchasing their property as a place to live long-term, rather than an investment. Do be aware that some fixed rate mortgages charge a fee if you terminate the loan before the end of the repayment period – so check the fine print carefully before making your final decision.

Adjustable Rate Mortgage

An adjustable rate mortgage, on the other hand, offers a fixed interest rate for a few years – normally three to 10 – and after that period, your interest rate will periodically change based on what’s happening in the wider financial markets.

One major benefit of an adjustable rate mortgage is that for the initial period of the load, your interest rate is typically lower than what you’d get with a fixed rate mortgage. There’s also the chance that during the life of the loan, you monthly payments could at times decrease. However, saying that, your interest rates can also rise. Because interest rates are unpredictable with an adjustable rate mortgage, it’s harder to plan for them, and many people don’t want that kind of uncertainty when it comes to their finances. Then again, adjustable rate mortgages can be a good option for investment buyers who aren’t planning on holding on to the property for the long term.

Government-Insured Mortgage

Besides fixed rate and adjustable rate mortgages, another type of home loan to consider is a government-insured mortgage. Insured by the Federal Housing Administration or the Veteran’s Association, these loans are typically easier to qualify for than the conventional fixed rate or adjustable rate mortgages, offer lower closing costs, and usually require a much lower down payment.

However, government-insured loans do have a few drawbacks. They can’t offer the same variety of loan options as you’d find when choosing a conventional mortgage, and interest rates tent to be higher than with other home loans. To qualify for a Federal Housing Administration loan, your property will also need to pass a housing standards inspection, which could limit what kind of home you can buy – and condos are often not eligible for this type of loan. In addition, you may be required to pay a special insurance fee before your mortgage is approved.

While there are a number of factors to consider when it comes to choosing the right home loan for you, the process of buying a house doesn’t have to be complicated. Speak with a home loan expert if you need any help making sense of everything, or visit a home buying forum to learn more. HUECU can connect you to a qualified mortgage officer, and provides regular community events to offer more information on everything you need to know about home loans and purchasing a property.