There’s no one-size-fits-all approach when it comes to financing a home. Instead, there is a wide range of conventional and government options. Here is a complete look at the basic alternatives to help you decide which kind of mortgage loan is right for you.
Fixed-Rate Mortgage
Can be obtained with as little as 5 percent down payment. If the down payment is less than 20 percent, Private Mortgage Insurance (PMI) might be required to protect the lender.
Term: Paid off in equal monthly payments during 15, 25 or 30 years.
Interest rate: Remains the same for the life of the loan.
Pros: Stable monthly payments.
Cons: The total monthly payment can change if property taxes, homeowner’s insurance or mortgage insurance increases or decreases.
Adjustable-Rate Mortgage
The low initial interest rate with payments that typically increase during time. Popular with first-time buyers, as well as those who plan to move or refinance in three to five years.
Term: Varies by lender.
Interest rate: Subject to periodic changes.
Pros: May be less expensive in the short term.
Cons: In the later years of an ARM, the interest rate changes based on the market. That means monthly principal and interest payments could increase substantially.
Balloon
Ideal for borrowers who plan to move or refinance during the loan term. May allow conversion to a fixed-rate loan at term’s end.
Term: Five-seven year loans, amortized during 30 years. Repaid in equal monthly payments, plus a “balloon” payment for the remaining balance.
Interest rate: Varies by lender.
Pros: Lower interest rates and monthly payments.
Cons: Large payment due upon maturity.
Buy-Down
Homeowner, builder or third party puts additional cash upfront in exchange for a lower interest rate.
Term: Varies.
Interest rate: Varies.
Pros: Lower interest rates and monthly payments.
Con: May include large fees for closing costs.
Federal Housing Administration
Insures loans, making lenders willing to finance home purchases on favorable terms. Down payments as low as 3 percent. Either seller or buyer may pay discount points.
Term: Varies by lender; however, the FHA charges an upfront Mortgage Insurance Premium (similar to PMI) that can be financed in the mortgage amount or paid in cash at settlement. The borrower also must pay an annual MIP of 0.50 percent monthly.
Interest rate: Varies by lender
Pros: Often allows for a lower down payment than traditional bank loans.
Cons: Limited to properties designated as approved for government loans.
Non-Conforming
Offers homebuyers products that don’t conform to the normal FHA/VA and conventional lending guidelines. These unique loan products are tailored to fit specific financial situations, including bankruptcies (less than two years from discharge); no income/no asset verification loans; late payments (on previous or current mortgage); bank statement programs (for the self-employed); or excessive credit problems (but sufficient liquid assets).
Term: Varies.
Interest rate: Varies.
Pros: Allows borrowers who would not otherwise qualify under Fannie Mae guidelines to secure financing for a home.
Cons: Generally higher interest rates, upfront fees and insurance requirements.
Seller Assisted
Owners finance first, second, third or fourth loans. They may loan their equity back as a first mortgage (often called a “take back”).
Term: Determined by the owner.
Interest rate: Determined by the owner.
Pros: Can cover closing costs.
Cons: The seller might not report to the credit bureaus, which mean timely payments don’t necessarily improve a buyer’s credit score.
Second Mortgage
Made by the seller or by a commercial lender.
Term: Varies, with interest-only payments sometimes made until the term date when the balance is due.
Interest rate: Based on lender or buyer/seller agreement.
Pros: Easy access to cash at a favorable interest rate.
Cons: With quick access to cash, borrowers tend to tap more than they need.
Veterans Administration
Available to qualified veterans of the Armed Services, Reserves and National Guard. Loans can exceed $200,000 with no down payment. Flexible underwriting guidelines. Closing costs may be a gift. Can be combined with second mortgages and are assumable (upon qualifying) by future buyer.
Term: Payment fixed for the full term.
Interest rate: Varies by lender.
Pros: No down payment or PMI.
Cons: Come with a mandatory funding fee charged by the VA.
Renovation Financing
Provides buyers money to fix, renovate, repair, replace or remodel a home with the purchase. Can combine this type of financing with FHA or Fixed-Rate financing.
Term: Varies.
Interest rate: Varies.
Pros: Lower interest rate and larger tax deduction.
Cons: More preparation usually is required.
