Types of Home Loans

There are several kinds of home loans to look at and that’s not even counting the process yet. 

The good news is that you don’t need to be a financial guru to make it through the mortgage loan process, whether you’re a first-time home buyer or an experienced one.

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Conventional Mortgages

Unlike some of the loans, we’ll discuss below, the government does not back conventional mortgages. You’ll need a higher income and credit score to qualify for them, but the interest rates are typically lower, which means your mortgage will cost less over the lifetime of your loan.

The usual down payment requirement is at least 5% of the home’s purchase price. If your down payment is under 20%, you’ll also have to pay a fee for private mortgage insurance (PMI) on top of your monthly payments until you’ve paid 20% of the selling price.

Qualifying for these loans can be challenging, but the upside is, if you do qualify, the lower interest rate and larger down payment mean your mortgage payments will be lower every month. You may also be able to choose whether to pay off your loan over 15, 20, 25, or 30 years. All of that can be very helpful for your budget.

Conventional mortgages can be used for most kinds of property, including vacation homes, condos, and rental properties

Government-Backed Mortgages

There are a number of different types of government-backed mortgages, each with its own specific requirements and terms. The most common are FHA loans, VA loans, and USDA loans. FHA loans are insured by the Federal Housing Administration and are available to first-time homebuyers or those with less-than-perfect credit. VA loans are guaranteed by the Department of Veterans Affairs and are available to eligible veterans or active duty military personnel. USDA loans are guaranteed by the U.S. Department of Agriculture and are available to low- or moderate-income borrowers in rural areas.

FHA (Federal House Administration) Loan

FHA mortgage loans are a popular financing option for first-time homebuyers and other borrowers with limited funds for a down payment. An FHA loan can be used to purchase a home with as little as 3.5% down, making it a great option for borrowers who may not have the resources for a conventional mortgage. FHA loans are also available to borrowers with less-than-perfect credit, making them a good option for those who may not qualify for a conventional loan.

FHA loans can be used to buy, build, or refinance houses, approved condos, modular homes, and manufactured homes with pre-approval.

USDA (United States Department of Agriculture) Loan

The United States Department of Agriculture (USDA) offers a variety of loan programs to help farmers and ranchers purchase and develop farmland. The programs are designed to promote sustainable agriculture and support the financial stability of the agricultural sector.

The USDA loan programs provide low-interest loans for the purchase of farmland, the development of agricultural infrastructure, and the purchase of equipment and machinery. The programs also provide loans for the construction of rural housing.

The USDA loan programs are an important source of financing for the agricultural sector. The programs help farmers and ranchers purchase and develop farmland, and they also help to promote sustainable agriculture.

VETERANS (VA)

The VA housing loan is a great benefit for veterans who are looking to purchase a home. This loan allows veterans to finance up to 100% of the purchase price of a home, which can make buying a home much more affordable. Additionally, the VA housing loan offers a number of other benefits, including no down payment, no private mortgage insurance, and more.

Ohio Housing Finance Agency (OHFA) 

The Ohio Housing Finance Agency (OHFA) is a state agency that provides financing for affordable housing initiatives in Ohio. OHFA offers a variety of programs to help Ohioans find affordable housing, including the Ohio Housing Tax Credit, the Ohio Housing Trust Fund, and the Ohio Housing Loan Fund. OHFA also offers down payment assistance and homebuyer education programs. The agency’s mission is to “create quality affordable housing opportunities for all Ohioans.”

Fixed vs. Adjustable-Rate Mortgages

There are two basic types of home loans: fixed-rate and adjustable-rate mortgages (ARMs). As the name implies, with a fixed-rate mortgage, the interest rate stays the same for the life of the loan. With an ARM, the interest rate changes periodically, typically in relation to an index, and it could go up or down.

The main advantage of a fixed-rate mortgage is that the borrower knows exactly how much their monthly payment will be for the life of the loan. This can make budgeting easier and provide a measure of stability in an otherwise uncertain world. The main disadvantage is that if interest rates fall, the borrower is stuck in a loan with a higher interest rate than they could get if they refinanced.

An ARM could make sense if you plan on selling the property before the loan resets. For example, if you plan to sell in five years and interest rates are currently low, an ARM with a five-year reset could give you a lower interest rate than a comparable fixed-rate loan. Of course, there’s no guarantee that rates will still be low when the loan resets, so there’s some risk involved.

Interest Only Mortgages

Interest-only mortgages are a type of home loan where the borrower only pays the interest on the loan each month. The borrower does not pay any of the loan’s principal. Interest-only mortgages can be a good option for borrowers who want to keep their monthly payments low or who expect their income to increase in the future. However, because the borrower is not paying down the loan’s principal, the loan balance will not go down over time. This can make it difficult to sell the home or refinance the loan in the future.

Conclusion

In the end, it’s important to weigh all the pros and cons of each type of loan before making a decision. There’s no right or wrong answer, it all depends on your individual circumstances.

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