Buying a home is a big decision. If you're planning to get a loan to purchase property, you should know about the various home loan options. Each type comes with certain advantages and drawbacks and may not be suitable for every borrower. Selecting the right mortgage type can significantly reduce your financial burden, helping you achieve your financial goals in the long run.
Here are the most popular types of home loans you should know of. Fixed-rate loan This is the most common type of loan among homebuyers. The most significant advantage of fixed-rate home loans is that the interest rate and monthly payments remain constant for the loan term. This makes them a great choice for borrowers who want to know how much money they should set aside every month for paying off their mortgage. Fixed-rate home loans are available in terms of 10, 15, 20, 30, and even 40 years. In general, the longer the loan term, the lower is the monthly payment, and vice versa. A shorter loan term can help borrowers build equity and pay off the mortgage faster. Adjustable-rate loan Unlike a stable, fixed-rate loan, an adjustable-rate mortgage has fluctuating interest rates, depending on the market conditions. These loans usually come with a fixed interest rate for an introductory period, which can be 5, 7, or 10 years. During this period, borrowers pay an interest rate lower than the market rates on home loans. The rates adjust depending on the market rates after this period. This type of loan is best suited for homebuyers who are not planning on having the mortgage for long. It also makes for an ideal option for those who believe the rates will decline in the future. FHA loan FHA loans are government-backed and insured by the Federal Housing Administration. One major benefit of this type of mortgage is that it allows down payments as low as 3.5%, which is significantly low as compared to around 20% for conventional home loans. This makes FHA loans a great option for homebuyers with modest savings for a down payment. Another benefit of this type of loan is that borrowers with low credit scores (minimum 500) can also qualify. That said, the FHA loan amount is capped, and these loans come in only 15- and 30-year terms. VA loan VA loans are exclusively for military service members and veterans, and they are backed by the Department of Veterans Affairs. People who qualify for a VA loan can get a home with zero down payment and no mortgage insurance requirements. Another benefit is that closing costs are usually capped and may be paid by the seller in some cases. That said, the VA has strict requirements when it comes to the type of home one can purchase with this type of loan—eligible borrowers can get VA loans only for primary homes, and the home must meet minimum property requirements. USDA loan USDA loans are backed or issued by the United States Department of Agriculture. They are designed to help families with moderate or low income buy a home in rural areas. A borrower must meet certain income limits and purchase a home in a suburban or rural area to qualify for this loan. The main plus point of USDA loans is that no down payment is required on most properties, but borrowers will need mortgage insurance. Jumbo loan Jumbo loans are mortgages used to finance properties that are too expensive for a conventional loan. This means it's suitable for buyers who want to purchase a high-end property or a property located in an expensive neighborhood. Keep in mind that jumbo loan limits are different across countries and are modified from time to time. Additionally, these home loans can have fixed or adjustable interest rates. Borrowers generally need a credit score of 700 or higher to qualify for a jumbo loan. The down payment is higher and typically ranges between 10 and 20 percent, and the borrower's debt-to-income ratio must be below 45.