FHA. 30-year conventional. 15-year term. With so many loan options out there, how do you know which is best? There is not one across-the-board winner because everyone’s situation is different. But there are pros and cons of each that might make one loan work better for you. We’re comparing and contrasting some of the most popular options to help you make the best choice when buying a house.
30-year fixed-rate conventional
This is a 30-year loan with rates that are fixed every month. These loans follow Fannie Mae and Freddie Mac guidelines and are not backed by the government like FHA loans.
Pro: With set payments, there’s no need to worry about rising rates. Loans are available for a range of buyers, with options like HomeReady and Conventional 97 that offer as little as 3% down. Also, there is no upfront mortgage insurance fee like you have on FHA loans.
Con: You have to pay PMI if you put less than 20% down. There also may be higher credit score requirements than FHA loans.
A 15-year fixed-rate option also has fixed rates for the life of the loan. If you’re the type who wants to pay your home off more quickly, this could be a good choice.
Pro: You pay far less interest over the life of the loan and pay off your home in half the time.
Con: Monthly payments are higher.
FHA loans are federally insured, which is why down payment and credit score requirements are more relaxed.
Pro: FHA loans require as little as 3.5% down. Credit score requirements are also lower than conventional loans. You can typically qualify for a loan with a 3.5% down payment at a 580 score, and may be able to get a loan with a score as low as 500 if you have 10% down.
Con: You’ll have to pay mortgage interest, which you can’t get rid of unless you refinance. FHA loans also come with an upfront mortgage insurance fee.
“An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan,” said Investopedia. “Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.”
Pro: Rates are often lower during the introductory or fixed period than what a borrower can get with a fixed-rate loan, making homeownership more affordable initially.
Con: Once the ARM gets past the fixed period, monthly payments can skyrocket, leaving owners unprepared and possibly in danger of defaulting.
Looking to buy in a rural area? You may qualify for a USDA loan. USDA-eligible homes may also be located in some suburban areas. You can check eligibility on their website.
Pros: USDA loans offer low or even no down payments and low interest rates. Rates can be as low as 1% with subsidies on direct loans.
Cons: Household income is capped and a mortgage insurance premium is required for down payments under 20%.
Veterans Administration (VA) loans help military members and veterans purchase homes.
Pro: VA loans tend to have the lowest average interest rates, and loans are available with no down payment. In addition, there is “no monthly mortgage insurance premiums or PMI to pay,” according to VAloans.com.
Con: They’re not available to the general public, and veterans must meet a list of conditions.