Government vs Conventional loans

Home loans can be broadly grouped into two categories:

1. loans backed by a government program

2. Conventional loans offered by private financial institutions

In general, government backed loans will have lower interest rates, require a smaller down payment, and have lower credit score minimums than conventional loans. However, each type of government backed loan will have unique requirements that you will need to meet in order to be eligible to apply. In comparison, conventional loans offer a wide variety of options open to a larger group of people, but interest rates and down payments might be higher than a specific government backed loan. The first step to finding the best home loan option for you is to take a look at the list of government backed loans below and see if you qualify for any of these programs. Once you know which government loans you may qualify for, you can then compare the rates of that loan to any conventional loan that you may also be interested in.

Government Loan Programs

FHA Loan - The Federal Housing Administration (FHA) Loan is the most popular type of home loan in the US. To qualify for an FHA Loan you need a minimum credit score of 580 and a 3.5% down payment. However, this loan is only available to first-time homebuyers. If you are looking for a loan to help you purchase your first home, an FHA Loan is likely to offer you the best terms available on the market.

USDA Loan - USDA (US Department of Agriculture) Loans offer low interest rates and in some cases do not require a down payment at all. However, these loans are only made available to individuals with a low income who would like to purchase a home in a rural area. The specific level of income to qualify depends location, but according to the USDA, over 95% of the US qualifies as a “rural area” so be sure to check out the USDA website to see if you might qualify for this type of government backed loan before opting for a conventional loan.

VA Loan - VA (Veterans Administration) Loans also offer low interest rates and do not require a down payment. This type of loan is available to active duty military members, Veterans, and eligible surviving spouses. If you or your spouse has served or is currently serving in the US Military, consider looking into this option before conventional loans.

Comparing interest rates and loan terms

After you’ve determined whether a government backed loan or a conventional loan is the best option for you, the next step is to figure out the repayment terms and interest rate options you would like. To begin, take a look at the two main types of interest rate structures below to learn which will be more favorable for you:

Fixed Rate - As the title implies, a fixed rate mortgage has an interest rate that does not change over time. If you start a 30 year, fixed rate mortgage at 5% interest, you will pay 5% interest on that loan until it is paid off.

ARM - An Adjustable Rate Mortgage (ARM) has an interest rate that varies depending on the average of other interest rates being offered at the time. If the average interest rate goes up, yours will too; if the average goes down, your interest rate will be adjusted to match.

The advantage to a fixed rate mortgage is that you can quickly calculate your monthly payments for the entire mortgage and you do not need to worry that your interest rate will be affected negatively by the market. Conversely, an adjustable rate mortgage would allow you to save money if the average interest rate were to drop significantly, however you also risk owing more if the average rises. Additionally, adjustable rate mortgages often have much lower interest rates at the beginning of the loan than a fixed rate mortgage will. If you plan on selling your home before it is completely paid off, an ARM might be a better option for you.

CHOOSING A LOAN TERM

The most popular home loan term is 30 years. However, loan terms can range from as few as 10 years to as many as 40 years. The shorter the terms, the lower your interest rate is likely to be. Additionally, the quicker you pay off your loan, the less interest you will pay over the life of the loan. This can make a 10 year mortgage much more financially appealing than a 40 year mortgage. However, the monthly payment for a $200,000 fixed rate, 15 year mortgage will be much steeper than the same loan with a 30 year repayment term. When considering the term that is right for you, remember that there will be additional fees and taxes associated with your new home that will likely add to your monthly expenses. If you can afford a high monthly payment, a shorter term mortgage might be the right home loan option for you.

Finding Your Loan

Now that you know that you whether you are looking for a government backed or conventional loan, a fixed interest rate or an adjustable rate, and a short or long term loan, you can quickly sort through the options available and find the best home loan for you. Ready to search for your loan?

Resources

1. https://credit.org/2017/10/26/different-types-of-home-loans-available/
2. https://thelendersnetwork.com/fha-loan/
3. https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do
4. https://www.benefits.va.gov/homeloans/
5. https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-fixed-rate-and-adjustable-rate-mortgage-arm-loan-en-100/
6. https://www.bankrate.com/finance/mortgages/arm-vs-fixed-rate-mortgage-1.aspx
7. https://www.thetruthaboutmortgage.com/what-mortgage-term-is-best/