Types of Real Estate Loans

Comparing types of real estate loans is a great way for you to give yourself an overview of what your options are. This is a great strategy when you want to make the most out of your money and opt not to put the standard loaning process. Being aware of other options is a wise choice.

Below are the most common types of home loans so you can understand your choices clearly.

 

Fixed-Rate Mortgage

A fixed-rate mortgage is the most common type of home loan. It's simple and easy to understand. With this type of loan, your interest rate stays the same for the whole life of the loan.

That means:

• Your monthly payment for the loan stays the same, too.
   
• You’ll never be surprised by a higher payment later.
   
• It’s easier to plan your budget.
   

For example, if your monthly mortgage is $1,200 today, it will still be $1,200 in 10 or 20 years (unless your taxes or insurance change).

Most people choose this kind of loan because it’s safe and steady. If you like knowing exactly what you’ll pay every month, this might be the right choice for you.

 

Adjustable-Rate Mortgage (ARM) – Also Called a Hybrid ARM

For an adjustable mortgage rate, or ARM, they usually start with a lower interest rate first rather than the traditional fixed-rate mortgage. This also means that your monthly payment is lower at first.

This sounds too good to be true, but there is a catch:

Most ARMs today are called “hybrid ARMs”. They start with a fixed rate for a few years, then switch to an adjustable rate. These are often listed like this:

• 3/1 ARM – Rate is fixed for 3 years, then changes every year.
   
• 5/1 ARM – Rate is fixed for 5 years, then changes every year.
   
• 7/1 ARM – Rate is fixed for 7 years, then changes every year.
   

So in a 5/1 ARM, your interest rate stays the same for the first 5 years. After that, it can go up or down once each year, depending on the market.

ARMs can be a good choice if:

• You plan to move or sell the home in a few years.
   
• You want a lower payment in the beginning.
   
• You’re okay with the risk that payments might go up later.
   

But if you want peace of mind and steady payments, a fixed-rate loan is usually better.

 

Government-Backed Loans: FHA and VA

Some people qualify for government-backed loans, which are special loans made for people with lower income, smaller savings, or military service. These loans include:

FHA Loans (Federal Housing Administration)

For this loan you are only going to need 3.5% down because this is designed for people who do not have the perfect credit scores.

With an FHA loan:

• You don’t need 20% down.
   
• You can have a lower credit score.
   
• You will have to pay mortgage insurance, called MIP (Mortgage Insurance Premium).
   

There are two parts to MIP:

1. Upfront Mortgage Insurance Premium (UFMIP) – This is a one-time fee you pay at closing. You can either pay it all at once or roll it into your loan.
    
2. Annual Mortgage Insurance Premium – This is paid every month with your mortgage.
    

Also, there’s a limit to how much money you can borrow with an FHA loan. That limit depends on where the home is located.

VA Loans (Department of Veterans Affairs)

VA loans are for people who have served in the U.S. military, or are the spouse of someone who has. These loans are backed by the VA and can offer great benefits:

• $0 down payment in many cases
   
• No private mortgage insurance (PMI)
   
• Lower interest rates
   
• Easier approval process for veterans
   

To get a VA loan, you need a Certificate of Eligibility (COE). If you think you qualify, talk to your lender and let them know. They’ll help you apply and understand the details.

 

Jumbo Loans

Most home loans are called conforming loans, which means they fit within the regular limits set by the government. But if you're looking at a home that costs a lot more than average, you might need a jumbo loan.

A jumbo loan is used when your loan amount is higher than $726,200 (or $1 million+ in some high-cost areas).

Jumbo loans are used for:

• Homes in expensive cities or markets
   
• Big or luxury homes
   
• Second homes or vacation properties
   

Because these loans are bigger, they usually:

• Require more money down
   
• Need a higher credit score
   
• Might have higher interest rates
   

Make sure that jumbo loans are for you. These are not the type of typical loans you would want to have if you just have enough money saved. You need to have enough financial leverage before you get this loan.

 

How to Choose the Right Loan

Here are some questions to ask yourself:

• How long do I plan to stay in the home?
  If you’ll be there long-term, a fixed-rate loan may be better. If you’ll move soon, an ARM might save money at first.
   
• How much money do I have saved for a down payment?
  If you don’t have much saved, FHA or VA loans could help.
   
• Do I qualify for military benefits?
  If yes, a VA loan might offer the best deal.
   
• What is my credit score?
  If your credit is great, you might qualify for better rates or even a jumbo loan. If it’s lower, FHA may be more flexible.
   
• Am I buying in a high-cost area?
  If the home costs more than $726,200, you’ll likely need to look into jumbo loans.
   

 

Final Thoughts

Every homebuyer is different. The loan that works best for someone else might not be right for you. That’s why it’s important to:

• Do your research
   
• Check your credit score
   
• Talk to a lender you trust
   
• Ask questions until you understand all your options
   

Knowing all of these options, it is important to give yourself as much time as needed to think over these options carefully. Anyway at this point you are still on the stage where you are still looking for ways to get a better deal and so give yourself time. Do not rush into putting a down payment as soon as possible. Chances are, one small detail you missed and it might cost you even more.