What Home Buyers Should Know About Loan Types
If you’re getting ready to buy a home, the loan you choose matters nearly as much as the property’s quality. There’s no one-size-fits-all option here, and what works for your neighbor might not work for you. Here, we discuss what home buyers should know about loan types so that you can be in a much stronger position to make a decision you won’t regret.
Fixed-Rate vs. Adjustable-Rate Loans
The first thing you’ll run into is the choice between a fixed-rate and an adjustable-rate mortgage. Your interest rate for a fixed-rate loan is—you guessed it—fixed. It remains constant for the entire life of the loan, which means your monthly payment doesn’t change.
Meanwhile, an adjustable-rate mortgage, often called an ARM, starts with a lower rate that can shift up or down after an initial period, usually 5, 7, or 10 years. If you’re planning to stay in the home long-term, a fixed rate gives you more predictability. If you’re planning to sell or refinance within a few years, an ARM can save you money upfront.
Loan Term Length: 15 vs. 30 Years
Most home loans come in 15-year or 30-year terms. A 30-year term gives you lower monthly payments, but you’ll pay more in interest over time. A 15-year term means higher monthly payments, but you’ll pay off the loan faster and pay significantly less interest overall.
Conventional Loans
Conventional loans aren’t backed by a government agency. They’re offered through private lenders and typically require a credit score of at least 620, though a higher score gets you a better rate. You’ll also need a down payment, and if you put down less than 20%, you’ll pay private mortgage insurance (PMI) until you’ve built enough equity. These loans are common and flexible, but they do hold you to stricter financial standards than some other options.
Unconventional Loans
Not every buyer fits the conventional mold, and some financing options operate completely outside the traditional lending system. For example, if you’re attempting a fix-and-flip project, you should compare hard money and bank loans. Hard money lenders base approval on the value of the property rather than your credit profile. These loans move faster than traditional bank loans, but they come with higher interest rates and shorter repayment terms. They’re not designed for long-term ownership, but for buyers with a clear renovation and resale plan, they can be the right tool.
Government-Backed Loan Options
FHA loans, VA loans, and USDA loans are all backed by the federal government, which means lenders take on less risk and can offer more flexible terms. FHA loans accept lower credit scores and down payments as low as 3.5%, making them popular with first-time buyers. VA loans are available exclusively to veterans, active-duty service members, and eligible surviving spouses, and they often come with no down payment requirement. USDA loans are designed for buyers in eligible rural and suburban areas and also offer no-down-payment options.
Jumbo Loans for Higher-Priced Homes
If you’re buying in a high-cost area or looking at a home priced above the conventional loan limit, you’ll need a jumbo loan. These loans exceed the limits set by Fannie Mae and Freddie Mac, so lenders take on more risk. That usually means stricter credit requirements, larger down payments, and higher interest rates. They’re not complicated, but they do require stronger financial qualifications.
Know Your Options Before You Commit
As a home buyer, you should know about various loan types so you can understand your options well enough to ask the right questions. To learn more, talk to a HUD-approved housing counselor or a licensed mortgage professional who can walk you through what fits your credit profile, income, and goals before you apply.
