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You’ve watched the market closely, and you’ve finally decided to take advantage of the low interest rates and purchase your own home. If you have, then you’ll need to know one universal truth for home buyers: All loans aren’t created equal.
Some types of loans are actually better for first-time home buyers than others. Here’s a quick look at some of the different loans available — and why some of them may be better. Continue reading below to learn more about which of these loan options is strongly recommended for first-time buyers.
Offered through the Federal Housing Administration (FHA), first time home buyer loans have easier qualifications, enabling you to get a loan even if you don’t have the highest credit score. In addition, the down payment is only about 3.5 percent of the home’s purchase price, as opposed to the average of around 10 percent. Plus, these loans offer reduced administrative fees and closing costs.
The disadvantages with first time buyer home loans, however, are that your choices may be limited to houses within a certain price point. Likewise, you may be required to take a 30-year fixed-rate mortgage, whether you want to or not. If you want to see if you qualify for an FHA loan, you can check out Bills.com’s mortgage calculator.
You can use an FHA loan to build a home by applying for an FHA construction loan. Most FHA construction loans require you to have at least a 500 credit score and a 10% down payment. If you dream of building your home, you have two options. You can either apply for a construction-to-permanent loan or an FHA 203(k) loan. With a construction-to-permanent loan (often called a construction-to-perm), you can consolidate the costs of land, construction, and any lender fees into just one loan. FHA 203(k) loans are typically ideal for fixer-uppers. If you’re considering renovating a home or want to buy or refinance a fixer-upper, an FHA 203(k) loan would be your best bet.
A negative amortization loan gives you the opportunity to pay the lowest possible monthly payments; but these payments won’t even cover the interest for the month. It’s risky in the long run because your loan will not only increase over time; you’ll also end up paying more because you’ll be carrying the negative amortization loan for a longer period.
With a fixed-rate mortgage, your interest rate will stay the same throughout the entire life of the loan. These types of loans are typically taken for 30 years in order to make the monthly payment lower, but can also be taken for 10, 15 or 20 years. The biggest disadvantage, however, is that only a small part of the principal will be paid off during the first few years. You can compare fixed-rate mortgages here.
An adjustable-rate mortgage carries an interest rate that changes with the prime rate every year. Adjustable-rate mortgages offer some flexibility because you can take them for a much shorter period, but they’re also extremely risky if the interest rate happens to be fluctuating. Discover Home Loans has a good selection of both fixed-rate and adjustable-rate mortgages, if you are looking for the lowest rates. You can compare adjustable-rate mortgages here.
Balloon mortgages are similar to fixed-rate mortgages because they offer low monthly payments, but you’re really paying the interest, not the principal, every month. Toward the end of the loan, you’ll owe a huge balloon payment on the principal. Balloon mortgages work well if you have enough money saved for the balloon payment, but can be risky if your finances aren’t stable.
Whichever type of mortgage you choose, it’s a good idea to talk to a qualified lending specialist about your available options. Again, you can check out Bills.com’s mortgage calculator to see exactly how much you can qualify for first time home buyer loans. By choosing the right mortgage, you’ll have a better opportunity to get the home of your dreams, at monthly payments that you can afford.