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Home » Home Buying » 7 Types of Home Loans with Their Pros and Cons

7 Types of Home Loans with Their Pros and Cons

Published date: December 24, 2020 by Shana Yuri

A home is one of the most basic needs for everyone, but not everyone can buy a home within an easy reach. In this case, a mortgage or home loan is considered a beneficial option that can help you buy a nice place for living.

There are various types of home loans available in the mortgage market with varying mortgage rates. What you have to do is learning about the pros and cons to decide the best one that can fulfill your needs and wants.

Table of Contents

  • 1. VA Loan
    • Pros:
    • Cons:
  • 2. FHA Loan
    • Pros:
    • Cons:
  • 3. USDA Loan
    • Pros:
    • Cons:
  • 4. Bridge Loan
    • Pros:
    • Cons:
  • 5. Fixed Rate Loan
    • Pros:
    • Cons:
  • 6. Non-Conforming Loan
    • Pros:
    • Cons:
  • 7. Adjustable Rate Mortgage
    • Pros:
    • Cons:

1. VA Loan

Veterans Affairs (VA) Loan is particularly intended to provide a mortgage for veterans and service members. That being said, this loan can only be given to those who have done military services in the US Military. The qualified borrowers in the VA Home Loan are the veterans who have served during wartime for consecutively 90 days, during peacetime for 180 days, and have reserved for six years.

Pros:

  • In the mortgage market, VA Loan is considered the best deals with competitive rates of interest.
  • VA Loan offers mortgage without a down payment and insurance requirement, making the process easier and cheaper for veterans.

Cons:

  • There are strict requirements for the type of home that can be purchased. For instance, the home must be used as a primary residence and must meet the requirements of the minimum property.

2. FHA Loan

Suitable for first-time home buyers, Federal Housing Administration (FHA) Loan offers a mortgage with the lower down payment. This type of loan is not only used by personal buyers. It also allows companies or charitable organizations to take out a mortgage as a gift for other people. Regarding this, many employers often use FHA Home Loan to provide a housing facility for their selected employees.

Pros:

  • FHA Loan offers a low-down payment, which can be helpful for those buying a house for the first time.

Cons:

  • Despite the low-down payment, FHA Loan requires you to pay additional payment when the loan closes. It is called the up-front mortgage insurance premium (UFMIP).
  • You are also required to pay the mortgage insurance premium (MIP) on a monthly basis. It can increase the amount of mortgage rates that you have to pay every month.
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3. USDA Loan

USDA Rural Development Loan is administered by the government to help families in the rural areas getting a mortgage. This service is initially aimed for those who live in rural neighborhoods with difficult access to the city center.

However, some types of USDA Home Loan can offer the mortgage for exceptional borrowers who live within a shorter distance to the city. Keep in mind that in order to get this loan, your household income must not exceed the limit in the program guidelines of USDA.

Pros:

  • USDA Loan offers a mortgage with zero down payments.
  • It is considered an effective solution to social problems in rural areas. Because of this program, urbanization can be suppressed while people living in rural areas can improve their social condition.

Cons:

  • USDA doesn’t support a loan for duplex homes.
  • Geographic limitation of USDA Loan may restrict you to buy your dream home in certain locations.

4. Bridge Loan

Bridge loans, also known as a gap loan or repeat financing, are targeted to those who want to buy a second home before selling the first one. By wrapping the current and new mortgage, you only need to give one payment for both homes. Later, the refinance of both mortgages will be paid once you have sold the first home. These types of home loans are usually chosen by homeowners who have an excellent credit score.

Pros:

  • Bridge loan is a simple, yet effective way for transitioning between two different homes.
  • This type of loan offers a short lending term that can benefit you financially.

Cons:

  • The fees and high interest rates are higher due to the combination of two mortgages.
  • The two-house contingency is considered risky for some people.

5. Fixed Rate Loan

With the unexpected increment in loan rates these days, many people are looking for types of mortgage that will not be affected by interest rates. If you’re also one of those people, fixed rate loan or fixed interest rate is the best option for you. Within the set period of 1-5 years, the interest rate of this home loan will stay at the same amount. That way, you don’t have to worry about any aggravating circumstance caused by increased annual rate.  

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Pros:

  • A fixed amount of monthly mortgage will save you out of trouble from thinking about changing interest rates.
  • The consistent payment of the fixed home loan is beneficial for those who are on a strict budget. It can also help you get started when buying a house for the first time.

Cons:

  • The mortgage rate is relatively higher than most other types of home loans.
  • Unlike variable loans, a fixed home loan doesn’t allow loan switching before the mortgage is paid completely.

6. Non-Conforming Loan

The main targets of the non-conforming loan include people who have been unemployed for a while. It means that they can’t receive an income for the time being and don’t have a good credit history.

Pros:

  • In addition to offering mortgage, non-conforming loan provides a service in which you can have a credit for more than 80 percent of the home value.

Cons:

  • When the property value drops, the non-conforming loan may lose its benefits.

7. Adjustable Rate Mortgage

Adjustable Rate Mortgage (ARM) is a type of home loan rates which provide a low interest rate within a certain period of time. The set period in ARM usually ranges between 5 to 10 years. After the period has passed, the interest rate, as well as your regular payment, will adjust or increase annually. The adjustment will be based on the interest rates at the time.

Despite the increasing rate in later years, ARM is still a good option for those who have credit scores below average. If you are planning to sell the property at some point, this type of loan can also help you get a higher profit.

Pros:

  • The lower interest rates of ARM can help you get started on a mortgage, especially if you don’t have a good credit score.

Cons:

  • The rules and structures of ARM are slightly complicated and may confuse some borrowers.

With different types of home loans in the market, it is not easy to decide which mortgage type is right for you. Hopefully, looking at their upsides and downsides will help you pick the one that can suit you best.

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Hi, I am Shana Yuri, a wife, mom and lover of homemade & crafty things.

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