Choosing Among Home Loan Options

When purchasing a home for the first time, there are many home loan options available, which means you are almost certain to find a loan that fits your needs. On the other hand, beginning the process and understanding the difference between various types of home loans can seem overwhelming.

Below you will find several common home loan options, as well as the pros and cons of each option.

Conventional Loan

A 20% down payment is often required with a conventional loan, since there is no government agency to guarantee the loan against default.  For this reason,many first time homeowners are deterred from this option. Some lenders offer conventional loans with a smaller down payment (as low as 3%) if the loan can be protected by Private Mortgage Insurance (PMI).  PMI requires payment of monthly insurance premiums (which increase your monthly payment) but PMI can be dropped once you accumulate enough equity in the home.  

Keep in mind that the requirements to qualify for this loan are somewhat stricter than some other home loan options. If you have, a higher than average debt to income ratio or any credit difficulties, it might be challenging to qualify. 

As a first time home buyer, if you have the down payment and credit history to qualify, this can be an excellent option for you. 

Pros: You can qualify for some conventional loans with a down payment as low as 3%.

Cons: There are stricter requirements to qualify for a conventional loan.

FHA Loan

A (FHA) Loan is insured by the Federal Housing Administration, an agency of the US government.  FHA loans are designed to help those who are less likely to qualify for a conventional mortgage. This loan is particularly popular with first time home buyers since many don't have the down payment or credit history to be eligible for a traditional conventional mortgage.  FHA loans are subject to an upfront mortgage insurance premium (MIP) as well as monthly MIP which remain in effect for the life of the loan.

You only have to make a 3.5% down payment, and the requirements to qualify are less stringent than a conventional loan. For example, your credit score can be as low as 580 with an FHA loan versus the 620 requirement for a conventional loan.

If your credit is less than ideal or you struggle to qualify for other loans, an FHA loan might be a good fit. 

Pros: You can qualify for an FHA loan with a credit score as low as 580, loan requirements aren’t as strict and you only have to make a 3.5% down payment. 

Cons:.  Upfront MIP increases your loan balance.  Monthly MIP increases your payment and cannot be cancelled without paying off the loan.

VA Loan

The VAloan is designed specifically for members of the armed forces, military veterans, and their family members and is inured against default by the Department of Veteran's Affairs (VA)  There is no down payment requirement for a VA Loan.  

If you have military affiliations and you're a first time home buyer, this can be an ideal loan option for you. 

Pros: You don’t have to make a down payment.

Cons: Not making a down payment means your monthly mortgage payment will be higher.

Home Loan Options: Fixed-Rate or Variable Rate?

Along with considering the best home loan option for first time home buyers, you should also decide whether you want a fixed-rate or an adjustable-rate mortgage.

Fixed-Rate Loan

A fixed-rate loan means your interest rate will stay the same throughout the length of your loan. 

This option is beneficial because your rate doesn't change, so your mortgage payment doesn't either. Therefore, it's easier for you to budget for your mortgage each month. This can be especially helpful for a first time home buyer as you get acclimated to making monthly mortgage payments.

Pros: Your mortgage payment is consistent and if interest rates increase, you won’t have to pay more each month.

Cons: If mortgage interest rates decrease, your payment won’t go down. 

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) has an interest rate that can vary depending on  current market rates. The interest rate usually adjusts once each year resulting in a change in the monthly payment.  ARMs are typically a good option for people who do not expect to live in this home for more than 5-7 years 

The primary benefit of an adjustable-rate mortgage is the initial interest rate.  It is usually lower than a fixed rate loan resulting in a lower monthly payment. In addition, your payment can drop if  interest rates fall. On the other hand, if interest rates increase,your payment increases as well.

Pros: Your initial interest rate and payment are usually lower and you can benefit from a lower mortgage payment if market interest rates decrease.

Cons: Your mortgage payment will increase if interest rates rise. 

Hybrid ARM Mortgage

A Hybrid ARM combines the features of both fixed rate and adjustable rate loans.  The rate is fixed for the first few years and then the rate becomes adjustable. These loans offer initial rates below a fixed rate mortgage but higher than a straight adjustable rate mortgage.  

Hybrid ARMS typically come as  3-1, 5-1, 7-1 and 10-1 ARMS (other options are out there).  The first number tells the number of years the rate will be fixed and the second number tells how often the rate will adjust after the fixed rate period.  For instance, a 7-1 ARM has a fixed rate for the first seven (7) years (the 7 in 7-1).  At the end of year 7 the rate will be adjusted and then it will be adjusted every one (1) year thereafter (the 1 in 7-1).  The higher the first number the less difference there is between rate on the hybrid ARM and the rate on a fixed rate mortgage

Pros:  The initial interest rate is lower and the payment will not change for the first few years.

Cons:  If rates increase you may have to consider refinancing your mortgage loan at the end of the fixed rate period.

Getting A Home Loan For First Time Home Buyers 

As a first time home buyer, the home loan option you choose will significantly impact your experience as a homeowner. With so many options available, you will want to talk to an experienced lender  to make your process as enjoyable as possible. 

With our free pre-approval process, terms tailored to fit your budget, quick, local decision-making, knowledgeable loan advisors, and competitive rates, we can help you secure financing for your first home. 

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