A Beginner’s Guide to the Different Types of Loans for Homes
Did you know that the U.S. homeownership rate rose to 65.8% in the second quarter of 2022? That’s 0.40% higher than the first quarter of the same year! Homeownership, after all, is still a dream and a priority for many U.S. adults. Indeed, a 2022 poll found that this is true for 74% of Americans. That’s more than those whose primary goal is to have a successful career (60%) or get a college degree (35%). Fortunately, several types of loans for homes exist to help buyers become homeowners.
We’ll look at some of the most popular ones below, so keep reading.
Fixed-Rate Mortgage (FRM)
According to this guide on how to buy a house, hundreds of home loans exist, many of which have fixed rates.
Fixed-rate mortgages are popular because they protect borrowers against increasing mortgage rates. As a result, FRM borrowers pay the same amount for their home loans every month. After all, this type of home loan comes with an interest rate that doesn’t change over its life, also called the term.
Typical terms, in turn, range from 10, 15, 20, 25, and 30 years. However, experts say that the 30-year option is the most “dominant” of all types of mortgages.
Adjustable-Rate Mortgage (ARM)
The interest rate of an adjustable-rate mortgage fluctuates from time to time. Such changes depend on housing supply and demand, but they often occur yearly. For the same reason, ARM borrowers may see their mortgage rates and monthly repayments go up or down.
Despite that, an ARM may still be an ideal choice as it often comes with a low introductory rate. This promotional period usually lasts 3 to 7 years, after which the rate can already go higher or lower. Thus, it can be a good deal for borrowers who think they’ll have enough to pay off the loan before their rate changes.
Government-Backed or -Insured Mortgage
In the U.S., eligible individuals may apply for mortgages insured or backed by the government. This backing usually entails the government paying lenders in case of borrower non-repayment. That gives lenders a degree of reassurance, letting them offer loans with lower rates.
Three bodies in the U.S. offer government-backed or -insured mortgages, including:
- The Federal Housing Administration (FHA)
- The United States Department of Agriculture (USDA)
- The United States Department of Veterans Affairs (VA)
Each agency sets specific requirements, such as having low to moderate income levels. However, in the case of USDA loans, the property must also be in a rural area. On the other hand, VA loans are only available to veterans or servicemembers.
Explore and Compare These Types of Loans for Homes
And there you have it, your brief but concise guide on the various types of loans for homes. Now you know that an FRM is the most popular, but an ARM can cost less in the long run if you can pay it off before its rate spikes. You also learned about government-backed loans, which you should consider if you qualify.
With that in mind, it’s time to explore and compare your options further.
Are you looking for other home-related guides like this? Check out our latest blog posts, then!