Home Loans 101
While the top 1% of population can afford to buy home with cash, majority of the people buy a home with a mortgage loan. There are a lot of different kind of loans with different kind of rates. Get some understanding on the qualification, description, interest rate and your monthly payment before jump in to buy a house. The best way is to get a loan pre-approval letter which also benefiting your position when submitting an offer.
Conforming Loan
The loan requirements are set forth by Freddie Mac and Fannie Mae. The maximum loan amount is $ 417,000 (in Alaska & Hawaii is $ 625,000). Above this amount is considered a jumbo loan that typically has a higher interest rate.
Conventional Loan
This type of loan is not guaranteed or insured by government, which is affecting the lender in the case of borrower’s default.
Government Loans
There are 3 types of government loans: FHA, VA and USDA. Just like its name, in the event of borrower’s default, FHA loan is guaranteed by The Federal Housing Administration and VA loan is guaranteed by Department of Veteran’s Affairs. The benefit of FHA Loan is you can put a really low down payment and still qualified.But with a low downpayment (less than 20%), you will need to pay a mortgage insurance which will increase your monthly payment.
USDA loan is offered to rural borrowers who can’t get conventional loan but there are income requirements to be qualified.
Fixed Rate vs Adjustable Rate
The most popular one is 30-year loan with fixed rate. Fixed rate means the interest will not change until the loan is paid off. Another popular option is 15-year loan. The interest rate tends to be lower compare to the 30-year loan, the monthly payment obviously become much higher but you will finish paying your loan faster.
Just like its name, the interest rate on adjustable rate loan starts with a lower rate but will increase after a period of time, depending on the market rate but with a cap. Normally it’s outlined on the loan agreement. This type of loan normally good for people who doesn’t plan to keep the house for a long period of time or if you think the market rate will fall or at least stay the same after the “fixed” period.
Interest Only Home Loan
With this loan, your monthly payment is typically pretty low compare to other loans where you pay down some principal amount on top of the interest. Well, mortgage interest payment is tax deductible but on the other hand, do you really want to be paying interest forever? Depending on your situation, your purpose in buying a home and how long you would like to keep the home, this might be a good thing to do for some people.
her than mortgage, there are other things to be included in your home purchasing calculation; insurance and property tax. Like I mentioned previously, if you plan to pay less than 20% down payment, you’ll be paying mortgage insurance as well. Discuss with a loan officer, get an understanding of what type of mortgage that you might be qualified with what interest rate, then calculate the possible monthly payment before you browse around shopping for a house.