So, you’re in the market for a new home? Congratulations! Buying a home is a huge accomplishment. It’s also a significant financial decision. Before you start house hunting, it’s crucial to have a firm understanding of the different financing options available to you as a homebuyer. In this blog post, we’ll break down the basics of four different types of financing so that you can make the best decision for your unique circumstances.
The advantages of owning a house
For many people, owning a home embodies the American dream. And while buying a house isn’t suitable for everyone, there are many advantages to homeownership that everyone should consider.
One of the most significant advantages of homeownership is the financial stability and equity buildup that comes with it. Unlike renting, which represents a constant outflow of money with no long-term benefits, each mortgage payment on a house builds equity and increases the homeowner’s net worth. Over time, as the mortgage is paid down and property values increase, this equity can become quite substantial.
Another advantage of owning a home is the freedom and flexibility it affords. Homeowners can customize their living space to suit their needs and taste without worrying about a landlord’s approval. They can also make lasting improvements to the property, increasing its value over time.
Lastly, owning a home gives people a sense of roots and belonging in their community. When you own a home, you’re more likely to get involved in local events and activities and develop relationships with your neighbors. This can lead to increased social capital and improved quality of life.
Financing options
The good news is that many different financing options are available to homebuyers. The loan type you choose will depend on your personal circumstances, such as your income, credit score, and employment history.
Federal Housing Administration Loan (FHA Loan)
FHA loans come with insurance from the Federal Housing Administration. They are a good option for first-time homebuyers or anyone who hasn’t owned property in at least three years. FHA loans typically come with lower credit score requirements than conventional loans and require as little as 3.5% for a down payment.
The key advantages of FHA loans include their flexibility and availability. One downside of FHA loans is that they require borrowers to pay for both private mortgage insurance—which protects the lender if you default on your loan—and annual premiums for FHA insurance—which covers the borrower if the home goes into foreclosure.
Fixed-Rate Mortgage
A fixed-rate mortgage is one in which the interest rate remains fixed for the duration of the loan (typically 30 years). That means your monthly payments will stay the same month to month, making budgeting easy. One downside of a fixed-rate mortgage is that they usually come with higher interest rates than adjustable-rate mortgages.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage, or ARM, is a home financing option where the interest rate on the mortgage is not fixed but changes periodically over the life of the loan. This can mean that your monthly payments may go up or down, depending on market conditions. While this may sound like a risky proposition, some potential benefits to an ARM may make it worth considering.
For one thing, the initial interest rate on an ARM is often lower than what you would get with a fixed-rate mortgage. This can save you money in the short-term, allowing you to put more towards the principal each month. Additionally, suppose interest rates rise over time (as they’re predicted to do in the coming years). In that case, you may still be able to lock in a lower rate by refinancing into a new ARM.
Veterans Affairs Loan (VA Loan)
VA loans are guaranteed by the Veterans Affairs office. They are available to eligible active-duty service members, veterans, reservists, and National Guard members, as well as their unmarried surviving spouses. VA loans don’t require borrowers to pay private mortgage insurance or an annual premium for VA insurance and often come with lower interest rates than conventional and FHA loans.
One potential downside of VA loans is that they may require borrowers to pay a funding fee at closing, which can range from 1.25% to 3.3% of your loan amount depending on factors like whether you’re using your VA eligibility for the first time and whether you’re making a down payment on your home (borrowers who make no down payment are required to pay 2.15% of their loan amount).
The bottom line
There you have it! These are just some of the different financing options available to homebuyers. As you can see, there are advantages and disadvantages associated with each type of loan—it’s important to do your research and consult with a financial advisor before making any decisions about which kind of loan is right for you.
