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Whether you are a homeowner or a person looking to purchase your first home, it is important to understand the different types of loans available today. You might need a loan to finance your home purchase, remodeling, or even renovations.
Even though there are many options available to choose from, it does not mean that they are all suited for your specific needs. This makes it difficult for one to choose the right loan or even a lending company.
With so much information available on the internet, you might find yourself confused about what to do when finding a way to finance your home purchase or renovations. In this article, we will discuss different types of loans for homeowners.
They include;
Fixed-Rate Loans
Fixed-rate loans are conventional loans that come with a monthly payment and interest rate that applies throughout the lifespan of the loan. This is the first type of loan you need to look at when buying a home or before beginning your home renovation. It has a term of either fifteen or thirty years.
The interest rate remains the same throughout the fifteen or thirty years. It cannot be changed. They are best suited for homeowners who do not plan to relocate anytime soon. If you crave predictability, this is also the best loan for you.
But how does it work? Well, a fixed-rate loan is the simplest loan when it comes to payments. You simply pay a certain amount of money for a number of years. However, it requires a downpayment before you get the loan.
FHA 203(k) Loan
If you are interested in Federal Housing Administration (FHA) backed loans, then you need to know what an FHA 203(k) loan is. It can be described as a financing or refinancing option through which you can combine all home-related costs into one mortgage.
An FHA 203(k) loan can take either a fifteen or thirty-year term with a fixed interest rate or an adjustable one. You can use this loan for home purchases, and materials or labor for those renovating or constructing a home.
Since the FHA 203(k) loan is backed by the government, it comes with flexible terms compared to most of the loans discussed in this article. You will also not find strict requirements when applying for this loan.
Just like with other loans, you have to qualify for this loan to get it. Your qualification will be based on factors such as your debts, credit score, credit history, and income.
Adjustable-Rate Loans (ARMs)
Adjustable rate loans come with lower interest rates compared to fixed-rate loans. However, this does not happen for the entire loan term. You will be paying a low-interest rate for some period – mostly five to/or ten years.
After the expiry of that period, your monthly payments and interest rates will be adjusted. This might happen every year depending on the market and existing interest rates. In case interest rates increase, then your monthly payments will also increase. The vice versa is also true.
This is one of the best loan options for homeowners with a low credit score. This is because they cannot get favorable rates on fixed-rate options. It is also suitable for homeowners who do not want to stay in their homes for long. They can sell the home and move when the interest rates start changing.
USDA Loan
This is also a government-backed loan. Also known as USDA Rural Development Loan, it is made for people who live in rural areas. If you are eligible, you will have the government financing up to 100% of the price of your home.
This means that you will not be required to make any payments when applying for the loan – such as a downpayment. It also comes with some of the best interest rates you will find among all the loan options discussed here.
The USDA loan is the best loan option for those living in rural areas. They also have to prove that they are struggling financially for them to qualify for this loan. These loans are made to make home ownership easy for such families.
However, it is important to note that you can borrow up to 41% of your debts. You will also have to get mortgage insurance.
VA Loan
Also known as the Veteran Affairs loan, a VA loan is made for those who have worked with the United States military. This is the best alternative to all other types of loans, as long as you have worked with the military.
The application process is very easy compared to all the other loans discussed here. You will not even be required to make a downpayment or get mortgage insurance. This type of loan is best suited for veterans as long as they meet the eligibility requirements.
You can also apply for a VA loan if you have spent six years working in the reserves or spent at least 180 days in peace-making missions. However, there are strict requirements on the type of homes that you can buy with a VA loan. For instance, the home should meet all set property requirements as well as serve you as your primary residence.
Other types of loans that all homeowners need to know about include Jumbo loans, Bridge loans, and Combination loans. Understanding these types of loans is going to help you finance your home purchase or renovation with the right type of loan. It will also help you get a loan that meets your requirements.
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