The Pros and Cons of Different Types of Home Loans 

Shakira
Post : February 26, 2023

Why are you looking for home loans? Well, buying a new home is a significant financial decision that can be overwhelming, especially when it comes to choosing the right mortgage loan. With so many appealing offers available, it can be challenging to determine which loan is the most suitable for your needs.

Each type of home loan offers the necessary financing to purchase a new home, but each comes with its own set of advantages and disadvantages. Therefore, it is essential to consider your financial objectives, and personal circumstances, and seek the advice of a financial counsellor before making a decision.

Let’s explore some of the major types of home loans available and what they have to offer:

Conventional Loans

A conventional loan is a mortgage loan that is not backed up by a government agency. Do not confuse a conventional loan with a regular loan. Conventional loans are home loans offered by private lenders without any direct interference from the government. In other words, unlike FHA loans, they aren't insured or guaranteed by a government agency. 

Potential borrowers of this type of loan need to complete an official mortgage application and supply the required documents, credit history, and current credit score. 

Eligibility standards for conventional home loans vary by lender but most often a borrower would need the following to qualify for one. 

  • A down payment - low as 3%
  • Debt to income ratio not more than 43%, including mortgage payment. 
  • Past incidents of bankruptcies or foreclosures may be required additionally

The Pros

  • Conventional loans can be borrowed for your primary or secondary home and for the investment of a property
  • Sellers can contribute to closing costs
  • Flexibility on loan terms
  • Can be obtained faster and more easily than government-backed loans

The Cons

  • Required a lower DTI ratio (debt-to-income ratio) or a higher income
  • Meeting strict eligibility requirements overall
  • Higher down payment than some government loans

Adjustable Rate Mortgage

With these types of loans, your payments can increase or decrease based on the terms of your individual loan and a benchmark rate index.  Choosing this as the mortgage loan for your new home could be a very efficient decision because of the advantages present in it.

The Pros

  • Flexibility
  • Monthly payments could decrease

The Cons

  • Monthly payments could increase
  • Certain caps can cause negative amortisation
  • Unpredictability during the latter periods

Fixed Rate Mortgages

The longest fixed-rate mortgage period is thirty years. Adjustable-rate mortgages (ARMs) can be appealing due to their lower initial rates, but they have significant risk whereas fixed-rate mortgages promise predictability. These mortgages also come in a fifteen-year time period.

The Pros  

  • Stability
  • Simple to understand for first-time buyers
  • Stable monthly payments

The Cons

  • Necessary to refinance at times
  • No lower introductory rate
  • Cannot be customised

Fixed-rate mortgages are the most popular type of mortgage loan out there. The security and lower risk in this mortgage type make everyone choose this as the most suitable type of mortgage loan for their new home. 

Adjustable rate mortgages on the other hand have high risk but more financial benefits. 

Conventional loans are easier to obtain than regular loans. Less paperwork and procedures are required.

Mortgage loans are given to those who have a higher income and assets than debts. It is clever to choose the safest option whilst looking for a home loan method, especially if you are financially improving and new to real estate. 

As mentioned earlier, it is always preferable to consider your financial objectives, personal circumstances and also, and the advice of a financial counsellor before choosing the type of mortgage loan to finance your new home.

 

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