You’ve dreamed about it for years, you’ve finally found the perfect home, and now it’s time to buy. But this also means it’s time for that unpleasant part of the process: selecting and shopping for the right mortgage, the one that best fits your needs and financial situation. And with all the different types of loans and confusing financial jargon, it can be more than a little overwhelming. So let’s make it a little easier with this brief guide to different types of loans in Los Angeles.
The standard, traditional, and still most popular of all the different types of loans is the 30-year fixed-rate mortgage. It owes its popularity to the fact that the interest rate is locked in for the life of the loan (which is great when you get it when interest rates are low), and monthly payments are relatively low. But it does have drawbacks.
For one thing, the interest is higher than for a shorter-term loan, so you wind up paying substantially more over the course of that 30 years. One way around this is to make sure the mortgage contract allows for prepayments. That way, you can pay ahead, pay off the loan quicker, and reduce the amount you pay in interest.
Probably the second most popular of the different types of loans in Los Angeles is the 15-year fixed-rate mortgage. It is basically set up like the 30-year loan, except that you pay it off over a 15-year period, which can save you a lot of interest. The interest rate is locked in (“fixed”), so it will never change. The disadvantage here is that monthly mortgage payments will be higher than with a 30-year loan. So the trick is to determine whether paying less monthly or paying less in total interest better suits your needs.
Unlike a fixed-rate mortgage, an adjustable-rate mortgage (ARM) has an interest that can change. Typically, the interest rate is lower (often lower than current rates) during the first few years of the loan and then increases as the loan matures. Although interest-rate increases are capped, you’ll still see significant jumps in the later years. This type of loan is usually best suited for people who plan to live at the home for only a few years before selling.
Little (or Nothing) Down
With both fixed-rate and adjustable-rate mortgages, you usually have to come up with a hefty down payment, sometimes as much as 20% of the sale price. But if you don’t have that kind of cash on hand, you still have options – but will likely have to pay for private mortgage insurance.
Examples of these kinds of loans are VA loans and USDA Rural Development Loans, which allow no down payment. Fannie Mae and Freddie Mac loans come with only a 3% down payment requirement, and FHA loans are available with a 3.5% down payment. You do need to be aware, though, that you will begin buying your home with no or little equity, which presents a risk if its value falls.
If you intend to buy an upper-end home with a big price tag, then, out of all the possible different types of loans, you may need to consider a jumbo loan. This type of loan isn’t a “conforming” loan like those mentioned above. This means, then, that you’ll have higher hurdles to clear in order to get the loan – for example, a credit score of 700 or higher, some savings, and more than one appraisal. You may also have to have a higher down payment.
So there are indeed quite a few options when it comes to the different types of loans in Los Angeles. It all depends on your particular financial situation and what it will be in the future. Getting the right loan for you usually means leaning on the expertise of a qualified real estate professional.