Whether you are a first-time homebuyer or a repeat real estate flipper, you are going to need a mortgage. In this article, we are going to discuss some of the different types of loans that are available and try to help you determine which one is best for you given your situation.
Fixed Rate Mortgage
The first, and definitely the most common type, of mortgage is the fixed rate mortgage. Typically, these are listed as either 15-year or 30-year mortgages. Simply put, a fixed rate mortgage is a mortgage where the interest rate will never change. I.e. if you sign on to pay 4% per year, you will pay that amount constantly until the mortgage is paid off.
Adjustable Rate Mortgage
These are a variation of the fixed rate mortgage. Usually, an adjustable rate mortgage (ARM) will have a fixed interest rate for a set period at the beginning of the loan (often five or ten years), then the rate will vary based on the market. For example, if you see a listing for a 5/1 ARM, this means that the interest rate will be fixed for the first five years and then vary each year after that. I never recommend ARMs for anyone, particularly not in this rock-bottom interest rate environment.
FHA Mortgage Loan
An FHA mortgage loan is a government-backed mortgage that often charges fairly cheap interest rates and only requires a 3.5% down payment on the home’s purchase price. Furthermore, it allows those who have a very poor credit score, and even individuals who have defaulted on debt or gone bankrupt before, to have the ability to purchase a home. For years this was the most popular choice, but recent regulations now require all homebuyers with an FHA loan to pay PMI premiums for the entire life of the loan. According to Dave Ramsey, PMI can run $100 a month per $100,000 borrowed.
Which Mortgage is Best for Me?
I recommend a conventional 15-year mortgage where the payment is no more than ¼ of your take-home pay. A federally subsidized mortgage loan is only a good option if you really want to buy a home but can’t make the 20% down payment required or have a very poor credit score. However, you have to pay PMI insurance on these loans until you have 20% equity, which can be incredibly pricey.
About the author: Rachael Murphey is an entrepreneur and blogger on topics of success, real estate, business, marketing, personal finance, and health. She graduated from the University of Colorado Boulder with her Associates in English, and from the University of Colorado Denver with her Bachelors in Business Management. She has written for Bigger Pockets, The Odyssey Online, Idaho Real Estate, and RealtyBizNews. She currently lives in Denver with her dog Charlie.