Understanding What Type of Home Loan You Need

When it comes to buying a house, you have a lot of different choices. There are so many types of home loans out there, that it can be difficult to choose the right one. Now, the best thing to do is to speak with a loan officer, they are the ones that will figure out what type of loan fits your budget and needs perfectly. If you want to do a little research before you go in to talk with them, then keep reading as your accountant in Billings, Montana explains the varying home loans.

Do You Want a Fixed or Adjustable Rate Home Loan?

No matter what style of mortgage you choose, you will have to decide if you want a fixed rate mortgage, or an adjustable rate mortgage. Here’s the difference between the two.

Fixed Rate – A fixed rate mortgage is exactly that. When you sign on the dotted line, you are locked into an interest rate that won’t change until you refinance or pay it off. These are the most popular types of loans and they come almost always in 15 and 30 year options.

Adjustable Rate – An adjustable rate mortgage (ARM), on the other hand, has interest rates that adjust periodically. Generally speaking they are fixed for a few years, and then readjust after that. For instance, a 5/1 ARM is a mortgage that is fixed for the first 5 years, and then adjusts every year thereafter based on the current interest rates.

Your particular financial situation will determine which is best for you.

Do you Want a Government-Insured or a Conventional Home Loan?

After deciding term and interest structure, you need to decide which type of loan you want. There are a lot of qualifying factors, which if you don’t meet those, then you have to go with a conventional home loan.

Conventional Loan – Basically this is just a home loan. It’s not government insured in any way.

Government Insured FHA Loan – The Federal Housing Administration (FHA) is an insurance program through the Department of Housing and Urban Development (HUD). Most people will qualify for this type of loan, even if they are not first-time home buyers. These loans help people get into houses even when they can’t meet the 20% down rule. The caveat, unless you put 20% down, you have to pay that pesky Private Mortgage Insurance.

Government Insured VA Loan – The Department of Veterans Affairs (VA) wants to make sure they take care of those who have served our country. Since many people returning from deployment don’t have the savings needed to put money down on a house, the VA loan allows for financing of up to 100% of the loan.

Government Insured USDA/RHS Loan – The US Department of Agriculture (USDA) has teamed up with the Rural Housing Service (RHS) to help those who live in rural areas that need homes. These are catered to those who have a low or modest income and don’t qualify for a conventional loan. These eligibility requirements are strict.

Do You Want a Jumbo or a Conforming Home Loan?

The final choice in loans is dependent on how big of a loan you are looking for. While most people are not going to need a jumbo loan, there are quite a few out there.

Conforming Loan – A conforming loan is simply one that conforms to the guidelines of Fannie Mae or Freddie Mac. Most of the guidelines have to do with the size of the loan; for many areas, like here in Billings, Montana, the loan must be under $417,000 in order to be conforming. That number adjusts periodically to account for inflation, and it varies depending on where you live in the country.

Jumbo Loan – A jumbo loan is simply one that is bigger than the limits imposed by Fannie and Freddie. These types of loans represent a larger risk to the issuer, so those obtaining them need to prove themselves worthy. That means a good high income, a great credit score, and a sizeable down payment.

Who knew that getting a home loan would have so many options? Fortunately, most people don’t need to worry about the majority of this. In fact, after speaking with your mortgage lender, you will likely only need to decide if you want a 15 year fixed rate, 30 year fixed rate, or adjustable rate mortgage.

When you do get your home loan, keep in mind that you can write off the interest that you pay on it. For 2015, you can deduct up to $1,000,000 off your taxes. Most people will never come close to hitting that mark. As your accountant in Billings, Montana, I can help you determine exactly what can be deducted and what cannot.

Practical Taxes is a full service accounting firm here in Billings, Montana. We don’t do home loans or initiate mortgages, but we do know the tax implications behind them. If you have recently bought a house, and you are worried about your tax situation, then we are here to help.