First-time homebuyers have many decisions to make, but one of the most important is choosing a home loan. Different types of buyers qualify for different loans, but what’s best for one person may not be a good fit for another. Mortgage interest rates, requirements for down payments or mortgage insurance, loan terms, fees and closing costs all impact the amount you will pay each month, so it’s important to choose your mortgage wisely.
Home loans fall into two basic categories: conventional loans, and government-backed loans such as VA, USDA and FHA loans.
Most loan programs give you a choice of either a fixed rate or adjustable rate mortgage (ARM). The fixed rate option keeps the same interest rate throughout the life of the loan, while the ARM changes over time. An ARM typically has a lower initial rate, but it then increases over time. For example, a 5/1 ARM has a low interest rate for the first five years, then the interest rate may increase every year after.
Your credit score can impact both your interest rate and the amount of down payment required. For example, a better credit score could drop your required down payment for an FHA loan from 10% to less than 5%. Some loan programs, like the USDA RD loans, have a minimum required credit score. It pays to build and maintain good credit.
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