For most buyers, the process of purchasing a home requires being approved for a mortgage before the sale can occur. But with so many choices available, it can be difficult for buyers to choose the one that will best fit their current needs and budget. Prospective home buyers who are struggling with this decision can use this guide to determine whether one of these three popular mortgage options will work for their home buying situation.
For many buyers, a fixed-rate loan with a low interest rate is the best possible option when purchasing a home. Fixed-rate loans offer a stable monthly mortgage payment that keeps housing costs affordable and make budgeting easier throughout the repayment period, typically consisting of either 15 or 30 years. Since these loans are not affected by fluctuations in the prime interest rate on the federal level, they are well-suited for home buyers who plan to own their home for several years. Fixed-rate loans, often called conventional loans, usually require a significant down payment, often 10-20% of the purchase price of the home.
Adjustable Rate Mortgages
Home buyers who move frequently for employment reasons or know they will only be living in the home for a few years can often save money by choosing an adjustable rate mortgage, instead of a fixed-rate.
An adjustable-rate mortgage usually offers an initial lower interest rate for a set period of time, typically one to ten years, after which the interest rate begins to adjust periodically in response to rising or falling interest rates in the lending marketplace. When interest rates rise or fall, the borrower's mortgage payment also rises or falls to a similar degree.
In addition to being beneficial for those who must move frequently, adjustable rate mortgages, or ARMs, are often a good choice for those with lower than optimal credit scores who may have trouble finding an affordable fixed-rate loan. Buyers in this situation who choose an ARM should consider working to raise their credit scores during the loan's initial lower interest rate period, so they will be able to refinance and qualify for a more affordable fixed rate loan before their adjustable rate mortgage payments begin to increase.
Prospective home buyers who want to purchase a home but do not have a large down payment saved can often qualify for a Federal Housing Administration loan, or FHA home loan. With low down payments, often as low as 3.5% of the purchase price and low closing costs, FHA home loans have been one of the most popular home loan choices over the past several decades for home buyers searching for homes in Dearborn Park or elsewhere.
Other favorable reasons for considering the use of an FHA home loan include:
- the ability to qualify with lower credit scores than conventional loans typically require
- the ability to use properly sourced gift funds to help with buyer closing costs
- the ability to use FHA financing for the purchase of mobile homes and manufactured housing
- the ability to use FHA financing to purchase multi-family residential housing with up to four units
Because FHA loans must meet the guidelines set by the Federal Housing Administration, buyers who plan to use them should expect more documentation requirements and longer timeframes for processing and closing the loan.
For more information about these and other popular home loan mortgage options, prospective buyers should discuss their situation with their real estate professional. Their agent will be able to help them understand the process and refer them to a reputable lender in their area.
Ted Guarnero, REALTOR® is a full-time real estate agent with over 1000 homes sold and $400 million in sales. Working with Compass real estate offering professional and effective real estate services to help you succeed in the local real estate market. Visit www.seeChicagorealestate.com for information on downtown Chicago real estate and to get in touch with an expert in the Chicago real estate market. Before you hire your next Realtor call Ted Guarnero 855-See-Chicago, it's on the House !