When it comes to financing your home, you have a lot of options. Choosing the right equity loan can save you time, money and stress — but how do you know which one to choose
A home equity loan is a great option to start with. It’s a fixed-term loan that borrows from the equity in your home. The funds come in a lump sum, which makes this loan ideal for major expenses. Home equity loan rates are often lower than personal loan rates, so this loan is also useful for debt consolidation.
Two of the most common home equity loans are FHA and conventional loans.
According to FHAHandbook.com, a conventional mortgage product is originated in the private sector and is not insured by the government. An FHA loan is also originated in the private sector, but it gets insured by the government through the Federal Housing Administration. This insurance protects the lender, not the borrower.
So how do you choose? Here are a few different things to consider:
How much can you afford to put down?
First things first, you’ll need to look at your finances and determine how much house you can afford. A mortgage calculator can help you figure out how much you can afford for a down payment.
If you can afford to put down between 5 per cent and 20 per cent, a conventional loan is your best bet. If you can only afford to put down 5 per cent or less, an FHA loan is a great way to minimize upfront costs.
How’s your credit score?
Credit scores play a huge role in deciding what type of loan you’re likely to be approved for.
Those with credit scores above 620 will usually be approved for a conventional loan and can expect lower monthly payments. Those with a credit score between 580 and 620 can expect to be approved for an FHA loan. Those with FICO scores under 579 may still qualify for an FHA loan, but will likely be asked to pay 10 per cent of the home’s value for a down payment.
Can you afford to pay mortgage insurance?
Mortgage insurance is intended to ensure the lender gets paid — even if the borrower defaults on the loan. It’s not always a requirement, but you should be prepared to pay it before you apply for a loan. The cost of mortgage insurance varies among lenders.
If you’re applying for a conventional loan and can pay 20 per cent as a down payment, you won’t have to pay mortgage insurance. If you put less than 20 per cent down, you’ll need to pay mortgage insurance until your loan-to-value ratio dips below 78 per cent.
If you’re applying for an FHA loan, expect to pay mortgage insurance for the entire length of your loan if you put down 10 per cent or less.
What kind of house do you want?
Now for the fun part. You know what you can afford, and you know your credit score. So now you have to decide: What kind of home do you want?
If you’re planning on purchasing a primary residence — either a home or an apartment — both conventional and FHA loans can help you. If you’re purchasing a vacation home or a property to plan to rent out, you’ll need to apply for a conventional loan.
With a diverse offering of mortgage products, Mountain America Credit Union is your guide through the process of purchasing a new home or refinancing an existing mortgage.