While looking for homes in the Bolivar, MO area, there are seven types of home loans you will be offered. We will look through all the different mortgages you can get and all they entail.
Types of home loans available
There are seven types of home loans available for Bolivar, MO homebuyers:
- FHA home loans
- Conventional home loans
- USDA mortgages
- VA home loans
- Interest-only mortgages
- Fixed-rate mortgages
- Adjustable-rate mortgages
FHA home loans
An FHA loan is a government-backed home loan for those with lots of debt or a lower credit score. They have easier-to-meet financial requirements. They are backed by the Federal Housing Administration which protects the company offering the loan if you default on your loan.
An FHA home loan requires a 3.5% down payment for credit scores 580 and higher or 10% for scores in the 500-579 range.
Pros:
- Credit score requirements are lower than other loan types
- It comes with a lower down payment
- Closing costs can oftentimes be rolled into your loan
Conventional mortgages
A conventional home loan is similar to an FHA loan but requires a stricter set of financial qualifications (minimum 620 credit score). They also typically have similar interest rates but lower mortgage insurance that ends when you have 20% home equity.
Pros:
- Lower costs than other loan types
- Mortgage insurance drops off eventually
Cons:
- Down payments can be high in certain cases
USDA home loans
A USDA home loan is backed by the US Department of Agriculture and makes purchasing a home more affordable for low-income individuals living in designated rural areas. If you qualify, you can even buy a home with no down payment but you’ll still be required to pay closing costs.
There are three types of USDA home loans:
- USDA direct loans that are issued for low-income borrowers with interest rates as low as 1%
- USDA loan guarantees offering low interest rates and down payments as low as 0%
- USDA home improvement loans given to qualified homeowners to make repairs or improvements on their homes
Pros:
- Has low or no down payment options
- Come with low interest rates
Cons:
- Must live in a qualifying rural area
VA mortgages
A VA loan is one of the best benefits available for eligible veterans, service members, and qualifying surviving spouses. It’s backed by the US Department of Veterans Affairs (VA). These types of home loans often come with no down payment and has income requirements that are easier to meet. VA mortgages are non-conforming loans, meaning they don’t meet the guidelines of conventional lenders like government-sponsored entities Fannie Mae and Freddie Mac.
Pros:
- Lower interest rates
- Lenient borrowing requirements
- No down payment
- No mortgage insurance required
Cons:
- You must meet the requirements to be considered a veteran, service member, or a surviving spouse
- You have to pay a funding fee that normally ranges from 1.25% to 3.3% of your loan amount
- Most VA loans require you to have savings not used for upfront costs to ensure you have the ability to make mortgage payments once the loan closes
Interest-only home loans
An interest-only home loan is one with scheduled payments that require you to pay only the interest for a specified amount of time, usually in five, seven, or 10 years. The amount you owe does not go down with each payment. Once the interest-only period ends you can either pay off the remaining balance, refinance, or begin to pay off the remaining balance in monthly payments. Usually, interest-only home loans come as an adjustable-rate mortgage.
Pros:
- Initial monthly payments are usually lower
- Can be paid off faster than a conventional loan
- Interest rates may be lower, at least initially
Cons:
- You’re not building equity until you’re done paying off interest
- If the value of your home declines, this can cancel out any equity gained from your down payment
- Low payments are only temporary
- Interest can go up because it’s an adjustable-rate loan
Fixed-rate mortgages
A fixed-rate home loan is a mortgage that offers a single interest rate for the entire term of the loan. The interest rate never changes, keeping your principal payments the same each month. These types of home loans come in 15 or 30-year installments.
Pros:
- Consistent payments make budgeting easier
- Your loan is fully paid off over the term of the mortgage
Cons:
- You’ll pay a little more on the front end
Adjustable-rate mortgages
Adjustable-rate mortgages (ARM), also called variable-rate mortgages, are home loans with an interest rate that adjusts over time based on the market. ARMs sometimes have a lower initial interest rate than fixed-rate mortgages. Because of this, your monthly payment will likely change making budgeting less predictable.
Adjustable-rate mortgages have an initial fixed-rate period (typically in the first 5, 7, or 10 years of the loan) in which your interest won’t change. After this time, your loan enters the adjustment period in which your interest rate can go up or down based on changes in the market. Sometimes, you’ll have a point during your loan in which you can lock in the current rate.
There are also conforming or non-conforming ARM loans. Conforming loans are mortgages that meet specific guidelines that allow them to be sold to Fannie Mae and Freddie Mac. Lenders can sell mortgages that originate to these government-sponsored entities for repackaging on the secondary mortgage market (in which leaders and investors buy and sell mortgages and the servicing rights that go with them). If a loan doesn’t meet these guidelines, it falls into the non-conforming category. These ARM loans may be offered to you if there are extenuating circumstances surrounding your loan such as you are buying a home in a high-cost area. Just be sure to read the fine print about the rate resets it entails.
Pros:
- Initial savings on interest rate
- Added budget flexibility
- Sometimes best option for buyers looking to move before the loan is up
Cons:
- Harder for budgeting long term
- Interest can end up higher than average
