Buying a New Home? How to Know What Type of Mortgage Best Suits Your Needs
Friday, July 27, 2018, 6:00 AM | Leave Comment
A home is one of the most expensive things that you will buy in your lifetime. In most cases, the purchase will be financed by a mortgage loan that will be repaid over a period of up to 30 years.
Let’s look at some of the loan products available and how to determine which one best suits your needs.
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Traditional Mortgages Offer the Best Overall Terms
As a general rule, a fixed-rate traditional mortgage loan offers a combination of low interest rates with the ability to quickly accrue equity in the home. This is because you will put 20 percent of the purchase price down when the sale closes.
While you are parting with a significant amount of money, a larger down payment means avoiding private mortgage insurance. It also means paying less in interest over the life of the loan since your principal balance is lower.
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Government-Backed Loans Help Those with Low Incomes
If you have a low income or are self-employed, an FHA or USDA loan could be your best loan choice. These loans require low down payments, and you can have someone gift you the down payment in most cases.
The only downside to a USDA loan is that they can only be used in areas designated as rural, which generally eliminates living in major cities or their suburbs.
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Jumbo Loans Are Best for Expensive Homes
Jumbo loans are designed for those who are buying homes with prices that exceed traditional mortgage limits. Generally speaking, this means homes that are more than $500,000, but the exact limit is determined by local market conditions.
Depending on your credit score and other factors, it may be possible to get a better rate on this type of loan when compared to a traditional or other form of mortgage.
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How to Choose between Variable and Fixed-Rate Loans
If you don’t plan on living in your home for at least five years, a variable rate loan could help save money as your interest rate will be lower.
However, if you plan on living in the home longer than that, a fixed-rate loan is generally best because your mortgage payment won’t change if interest rates rise.
As with any other purchase that you make, it is important that you don’t spend more than you can afford to.
Before choosing a mortgage, be sure that you are familiar with both the upfront and potential long-term costs. This can increase the odds that you get the most value for your money.
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