What Are the Different Types of Home Loans That Homeowners Get Today?
Did you know that the US homeownership rate rose to 65.5% in 2020? That’s an increase of 1.3% from the previous year!
That growth, in turn, may have spurred more Americans to become homeowners in 2021. After all, by the end of that year, US households owed $10.93 trillion in mortgage debt.
So, if you plan to apply for a mortgage yourself, it’s best to know which types of home loans you can get first.
Don’t worry, as we’ll tell you about them below, so keep reading.
Fixed-Rate Mortgage (FRM)
A fixed-rate mortgage assures you of a permanent or “fixed” interest rate.
For example, let’s say you sign a contract for a 30-year FRM with a 5% interest rate. You can expect that rate to stay the same within the 30 years you have to repay your home loan. That also means your monthly repayments remain the same throughout the life of the loan.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage has an interest rate that fluctuates from time to time. Those changes depend on market conditions, but they usually occur once a year. So, unlike an FRM, an ARM’s interest rate and monthly repayments can go up (or down).
That may seem too risky, but an ARM can still be an excellent choice if you don’t plan to stay in the same home forever. Besides, ARM lenders often offer a low introductory rate for the first few years.
For example, you might get a fixed 2.5% rate for the first five years of your ARM term. It then only becomes adjustable after that period.
The US government doesn’t issue mortgages, but it can insure or “back” them up. That assures lenders they can recoup their money in case a borrower defaults. Thanks to that security, lending institutions can offer borrowers lower-rate home loans.
Three government agencies back mortgages, including:
- The Federal Housing Administration (FHA)
- The US Department of Agriculture (USDA)
- The US Department of Veterans Affairs (VA)
FHA-backed mortgages have strict requirements, though, especially with income levels. As for the USDA, the loans they back must be for financing homes in rural areas. On the other hand, you must be a veteran or servicemember to qualify for a VA-backed loan.
Home Construction Loan
Even if you don’t find the perfect home (or if it doesn’t) exist, you don’t have to give up on homeownership yet. According to Hilltop Credit Partners, you can take out a loan to fund the construction of a new home. In that case, what you need to apply for is a new home construction loan, not a mortgage.
A home construction loan differs from a mortgage in that it only funds the costs of building a home. It also has a shorter repayment period, usually one year, unlike a mortgage that can run for 10 to 30 years.
The chief advantage of a construction loan is that it allows you to build a home exactly the way you want it. You can customize it to meet your needs and desires without compromising.
That makes a home construction loan ideal if you already own land (or find one for sale in an excellent location).
Compare These Types of Home Loans Today
As you can see, you have many types of home loans to choose from, such as an FRM, ARM, or a government-backed mortgage. Or, you can opt for a construction loan if your goal is to build a picture-perfect home from the ground up.
Either way, compare and review your top options ASAP, as interest rates are likely to climb this 2022.
Are you interested in reading more smart homeowner tips or income property guides? If so, we’re happy to share them with you, so browse our latest blog posts now!
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