Buying your home will most likely be the largest purchase of your entire life. It only makes sense, then, that you want to find the mortgage that is exactly right for you and your unique circumstances. So what is the best type of loan for you? The shortest and best answer is: It depends. No two home buyers are alike in every respect, and the best option (of which there are many) varies from buyer to buyer. So let’s see how to find out which type of loan is best for you in Los Angeles.
Three Key Factors for Determining the Best Type of Loan
When you boil it down to the essentials, determining which type of loan is best for you in Los Angeles involves basically three main factors or considerations. These are 1) the type of mortgage (conventional or government-backed), 2) the type of interest rate (fixed or adjustable), and the loan size (conforming or non-conforming). Now, we just need to examine each of these factors in a little more depth.
Type of Mortgage
The two main categories of mortgage types are conventional loans, which are backed by a bank or another private lender, and government-backed loans. The first step, then, toward finding out which type of loan is best for you in Los Angeles is to decide between a conventional or government-backed loan.
A conventional loan is offered by and backed by a private lender such as a bank, credit union, or savings and loan. Because these loans are not backed by any third party and the lender’s risk is thus greater, a conventional loan will require you to have very good credit. This type of loan also typically requires a larger down payment than others.
When is a conventional loan the best option? “if,” according to financial experts, “you can afford to save up a large down payment and build your credit score while lowering your debt-to-income ratio, a conventional loan is a great choice that can eliminate some of the extra fees and higher interest rates that may come with a government-backed loan.”
GOVERNMENT BACKED LOAN
The three most common government-backed loans, all with low down payment requirements, are:
FHA Loans – Insured by the FHA and “established to make homebuying more affordable, especially for first-time buyers, by allowing down payments as low as 3.5% of the purchase price.”
VA loans – Insured by the VA, offering low or no down payment, and available to active military and veterans.
USDA loans – Backed by the USDA and aimed at rural property buyers who meet the income requirements.
If you don’t have a lot of money saved up for a large down payment, but do have a decent credit score and stable employment, then a government-backed loan may be your best option. But you will also likely have to pay for private mortgage insurance with the lower downpayment.
Another important component of determining which type of loan is best for you in Los Angeles is figuring out which type of interest rate best meets your needs.
As the name implies, a fixed interest rate (typically for a 15- or 30-year term) never changes over the life of the mortgage loan. So you will always know what your monthly mortgage payment will be and can budget accordingly. A fixed-rate is your best option if you are “settled in your career, have a growing family and are ready to set down some roots.”
An adjustable-rate mortgage, on the other hand, has an interest rate that does change, usually at specific pre-set intervals. The interest rate typically starts out lower than with a fixed-rate mortgage (so is known as a “teaser rate”), but then usually increases at the end of the initial period. An adjustable-rate is a good option for “younger, more mobile buyers who plan to stay in their homes for just a few years or refinance when the teaser rate is about to reset. Paying a lower interest rate in those initial years could save hundreds of dollars each month that could fund other investments.”
How much you need to borrow to purchase your home determines in large part how big a risk you are for the lender, and that determines the kind of loan with respect to size – conforming or non-conforming.
“Conforming loans meet the loan limit guidelines set by the government-sponsored mortgage associations Fannie Mae and FreddieMac.” If you stay within the specified conforming loan limits (with respect to home purchase price), you can get a lower interest rate.
Non-conforming (or “jumbo”) loans “are for borrowers whose loan amounts are higher than the conforming loan limits in their areas. [They] are considered riskier and come with higher interest rates to protect lenders.” If you truly do want to purchase that house with the big price tag, a non-conforming loan may be for you – if that is, you have the cash to make at least a 20% down payment and pristine credit.
This is, of course, a lot to take in and may feel a little overwhelming. So why not discuss your loan options with your local agent? She will be more than willing to guide you in determining which type of loan is best for you in Los Angeles.