Buying your first home or your first investment property can be exciting, but challenging. There’s a lot to think about from mortgage rates, fees, and borrowing power, to the different types of home loans available.
Today, there’s many banks and home loan providers you can loan from, but it can be hard to work out which type of home loan is the right one for you. In this article we’ll cover the different home loan options available so you can make an informed decision. Let’s get started.
Fixed-Rate Home Loans
A fixed rate mortgage is the traditional type of home loan many take out when buying property. This type of loan works by locking in the interest rate for several years. This means the repayments won’t fluctuate like they would if the loan was on variable rate. Fixed rate mortgages make it easier for you to budget accordingly, and plan your finances ahead of time.
Pros
- Protection against rising interest rates for an extended period of time.
- Makes monthly repayments easy and predictable.
Cons
- If interest rates drop, you’re still fixed at the higher rate.
- Higher interest rates to start with when taking out the loan compared against the variable rate.
This option is best for buyers who want to live in their home and have stable, predictable repayments for an extended amount of time. Ideal for first time buyers.
Variable Rate Home Loans
Variable rate home loans are loans where the interest rate isn’t locked in place. Over the years the interest rate will go up and down as the market fluctuates. These loans can make it difficult to plan repayments because the repayments will go up and down depending if the interest rates change.
Pros:
- Interest rates tend to be lower to start with when signing the contract.
- Gives you more freedom to put a lot of extra repayments onto the loan to get it paid off faster.
Cons
- If interest rates go up, your repayments will too.
- You can’t predict what your ongoing payments will be.
This option is best for buyers who can repay the loan back faster by repaying additional sums of money.
Hard Money Loans
Hard money loan solutions are high interest, short term loans which are used by those who need quick financing or by real estate investors. Generally given by private lenders, these loans are secured by the property itself. Sometimes, other hard assets like cars, machinery and precious metals are also accepted. This type of loan works off the assets more than the borrower’s creditworthiness. They’re good for house flipper projects or where traditional financing isn’t an option.
Pros:
- Fast approval and funding process
- Less stringent credit requirements
- Flexibility in loan terms
Cons:
- Higher interest rates and fees
- Short repayment terms meaning higher payments
- Risk of foreclosure if the borrower defaults
Hard money loans are ideal for real estate investors, house flippers, or borrowers who need quick access to funds with a quick exit strategy.
VA Loans
VA loans are available for veterans, active-duty service members and members of the National Guard and Reserves. Backed by the U.S Department of Veteran Affairs, these home loans require no private mortgage insurance, no down payment requirements and offer low interest rates.
Pros:
- No down payment required
- No private mortgage insurance
- Favorable interest rates
Cons:
- Must meet eligibility requirements
- Funding fees may apply
These home loans are great for veterans and active-duty service members.
USDA Loans
USDA home loans are offered by the U.S Department of Agriculture for suburban and rural homebuyers who meet certain requirements in regards to income and property eligibility. These types of loans offer low interest rates, and no down payment. They’re ideal for low-to-moderate income buyers.
Pros:
- No down payment required
- Low-interest rates
Cons:
- Geographic and income based restrictions
- Requires mortgage insurance
These loans are suitable for homebuyers in eligible rural or suburban areas with limited funds for a down payment.
Which Home Loan is Right for You?
The home loan you choose will depend on your goals, financial situation, and the property you want to purchase. When working out which loan to choose, ask yourself.
- How long do you plan to stay in the home?
- How much can you afford for a down payment?
- What is your current credit score?
- Are you comfortable with potential fluctuations in your monthly payments?
- Do you qualify for any special loan programs, such as VA or USDA loans?
By understanding your situation you’ll be able to make the right decision on the type of loan that would best suit your needs.
Endnote
There’s numerous home loans available for everyone even if you want to buy your property in the USA, Australia, Mexico or even Spain. The one you choose however will be dependent on your ability to pay it back. Before you decide on a home loan option, it’s important to speak to your local lender for advice as well.
Also Read- Essential Tips for First-Time Homebuyers in Milwaukee
