How to Choose the Right Loan for You
When moving to Montana and finding a new residence, there are so many options to consider based on your lifestyle; the size of the home, the options to select – everything from tile color to extra bedrooms-, and of course, your mortgage financing. When you are secure and confident in your new home-buying decision, it’s time to choose the right loan that fits your needs. It can be difficult to figure out which loan is the right one for you. Use this guide to help you with the differences between the various loan types.
The terms of a long-term mortgage are usually 15 or 30 years, however, they can be as long as 50 years. Mortgages are secured by land, a home, or other types of real estate. The individual (borrower) agrees to pay the lender a certain amount over a period of time. The individual agrees to pay the price of the home plus the interest over the course of the mortgage terms, generally paying most of the interest off first.
The longer the terms of the mortgage, the lower the monthly payments will be, however, more interest will be paid out over the lifetime of the loan.
Also referred to as a ‘conforming loan’ that can be purchased by Freddie Mac or Fannie Mae. These entities are designed to give more purchasing power to individuals who meet certain criteria, such as higher credit scores and little debt. As government-sponsored enterprises, Freddie Mac and Fannie Mae purchase mortgages from lenders and sell them to investors. The home buyer will enjoy lower interest rates and lower monthly payments if they meet certain criteria.
Interest rates are always changing, which can be stressful for homeowners and what they must budget every month for their mortgage. A rate lock guarantees the borrower that the interest rate on the loan won’t increase or decrease over the period of time that is specified in the locked-in agreement. A separate fee or charge may be applied but the borrower can rest assured that even as interest rates rise, their monthly payments will stay the same.
Also known as ARM, an adjustable-rate mortgage is a loan that offers the borrower a variable interest rate. At the beginning of the loan, the interest rate may be fixed and then after a certain amount of time, it will adjust based on market conditions. This means that the borrower will see fluctuations in their monthly payments, they may go up but they also may go down.
ARMs are a great option for those who plan on selling their home before the initial interest rate re-adjusts. They are also a good option for those borrowers who are comfortable with the uncertainty of fluctuating monthly payments that are reflected by changing interest rates.
A 2-1 Buydown is a great option for borrowers who might not otherwise qualify for a loan. This type of financing offers a lower interest rate for the first two years, creating a lower (and more affordable) monthly payment. The agreement is that the borrower will pay for points at the time of closing. Keep in mind that after the first two years of lower interest rates, a higher rate will likely be put into place, raising monthly payments.
Government-backed loans refer to USDA, VA, and FHA loans. These types of loans pose less of a risk to lenders because if you default on your loan, the government pays the remainder of what you owe. If you don’t qualify for a conventional loan, you may qualify for a government-backed loan. Each type of loan has its own set of criteria that the borrower must meet.
- USDA Loan. Backed by the U.S. Department of Agriculture, lenders are able to offer borrowers lower interest rates to make housing more affordable for low-income families.
- FHA Loan. Backed by the Federal Housing Administration, this type of loan is available to families with lower credit scores and lower down payments. Mortgage insurance will also be a priority.
- VA Loan. This type of government loan is backed by the US. Department of Veteran Affairs and is available to eligible veterans, qualifying surviving spouses, and service members.
Exploring all of your home loan options is the first best step to take. Based on your preferences and situation, certain loans may work better for you than others. Calculate the estimated cost of your home purchase, taxes, and closing costs to determine how much you need to borrow. Your current debt, past bankruptcies, income, and credit score will all be reviewed to help you determine which type of home loan works best for you.