The Best Home Loan For You

Posted by Nick Niesen on October 29th, 2010

What Type of Home Loan is Best for Me?

While it seems there are countless loan options, many of the programs offered by lending institutions are similar, so it is helpful to know a few of the basic ways in which they differ.

The first basic difference is whether the interest on the loan is fixed or adjustable. Fixed rate mortgages keep the same interest rate for the life of the loan, whereas adjustable rate mortgages (ARMs) change the interest rate after a set period of time.

The second basic difference is whether the mortgage is backed by conventional means, i.e. private lenders, or the government.

So, how can you know which of these loans is best for you? A few simple questions can get you off on the right foot and save time in your search.

1. How long do I plan to keep this property?

If you are planning to stay for a long period of time, more that 5 or 10 years, fixed rates often give a secure base in case of increasing rates in the future. If current rates are not high, this can be a great way to get locked into a good rate without the risk of higher payments in the future.

Adjustable rate mortgages (ARMs) often offer a lower introductory rate, but also carry the risk of changing to a higher rate at the end of that period. The time period over which the rate will change differs from loan to loan. If current interest rates are high, an ARM could allow you to get a home now with an interest rate that will decrease in the future. If you are only staying for a short period of time, you can use the lower interest rate without the risk of a future increase.

2. How much can I afford for a down payment?

Both conventional and government loans offer programs to help people with less than the standard 20% for a down payment, so there a few to be aware of. Many of these loans allow you to purchase a home with as little as 3% down. FHA loans are generally for smaller amounts, geared toward first time home buyers. VA loans are offered specifically to veterans.

Once you have an idea of the type of loan that may work best for you, it is important to look into the specifics of that type of loan to ensure the best fit for your plans.