The average home in the US will cost about $357,300, and this only covers the physical home. This total doesn’t include closing costs, insurance, property taxes, or any other expenses related to owning a home. So, you’re looking at an enormous bill when you’re about to close on your first property.
And homes are just one example of expensive property items. If you want to purchase property without going bankrupt, you’ll need to understand how real estate loans work.
Keep reading for the different kinds of loans so you can get the right financing for your needs.
Conventional Loans
Conventional loans are the most common type of mortgage. They’re available to people with a good credit rating and a sizeable down payment. For example, if you have a credit score of 680 or above, you could qualify for a conventional loan with an interest rate as low as 4%.
For those who don’t have stellar credit or cash on hand for closing costs, there are other alternatives that can help you get into your dream home without breaking the bank.
FHA Loans
FHA loans are loans that are insured by the Federal Housing Administration (FHA) and backed by the government. They’re typically used for first-time homebuyers who have lower incomes and credit scores.
Because the government backs these loans, they come with a lot of requirements:
- Borrowers must have a credit score of at least 500
- Debt-to-income ratio can’t be greater than 50%
- Down payment must be at least 3.5% of the home
Typically, an FHA loan has an interest rate of around 4%, which is very low compared to other types of mortgage options available today.
VA Home Loans
VA loans are available to veterans and active members of the military. You can use this type of loan to buy a home or refinance an existing mortgage.
These loans have no down payment requirements, making them appealing to those who don’t want or can’t afford a large one. They also typically come with lower interest rates than other types of home loan options, so you can save money on your monthly mortgage payments.
Fixed-Rate Mortgage
Fixed-rate mortgages are the most common mortgage. They’re good for people who want to know what their monthly payment will be so they can better plan the rest of their budget.
You can find fixed-rate mortgages for all kinds of things. For example, look at https://www.heffinance.com/cannabis-real-estate-loans.php. They have a great article on the best real estate loans for cannabis growers—a field that most people wouldn’t even consider when it comes to financing property deals!
30-year fixed-rate mortgages are the most common, but some lenders offer 15-, 20-, and 25-year versions. These loans may cost more per month but they end up saving you money because they don’t last as long and thus don’t accrue as much interest.
Adjustable-Rate Mortgage
Adjustable-rate mortgages (ARMs) are loans where the interest rate can change over time, based on an index that’s tied to a specific market. The most common indexes are the federal funds rate and LIBOR (London Interbank Offered Rate), which is an average of interest rates offered by banks to other banks.
Most ARMs have initial fixed rates for anywhere between one and five years before starting their adjustment period. This can last anywhere from three to 30 years—and it varies depending on what kind of ARM you’re looking at.
The major benefit of an adjustable-rate mortgage is that it gives you the opportunity to pay less each month. The tradeoff is that your monthly payments will be higher when interest rates rise. This may not be much of a problem if you plan on selling your house before then.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is a secondary loan that allows you to borrow money against your home’s equity. With most HELOCs, borrowers are allowed to borrow up to 85% of their home’s value—and some will go even higher.
This means if a house has $200K in equity, then someone could take out up to $170K through this type of borrowing vehicle without putting money down.
Debt Consolidation Mortgage
Debt consolidation mortgages are ideal for people who have a lot of debt, especially credit card debt. If you have a lot of high-interest car notes and student loans, this is the loan for you.
Debt consolidation allows you to roll your debts into one loan, which you can repay over a longer period. You can use this loan to finance a property.
A debt consolidation mortgage will lower your monthly payments and help pay off other debts faster. It can also lower the interest rate on your mortgage so that you can get that dream home at an affordable price.
When shopping around for the right debt consolidation mortgage for you, keep in mind that not all lenders offer them. And if they do, their prices may vary wildly from lender to lender.
Learn Real Estate Loans in Depth
There are a lot of different real estate loans out there, and we hope this blog post has given you a better understanding of each one. When it comes to choosing the right loan for your needs, it’s important to consider all of your options carefully before making any decisions. That’s why we’re here.
In the finance section of our blog, you’ll find articles on everything from the basics of mortgages to how they’re used in real estate investing. Check them out if you want to learn more about the fascinating world of real estate.
