- Traditional mortgage loans provide lower monthly payments than renting an apartment, helping to build equity in the house.
- Home equity loans allow homeowners to access the equity they have built up in their homes as a financial resource.
- Piggyback mortgages combine two loans to avoid expensive private mortgage insurance and keep costs down.
- Cash-out refinancing is a loan that allows you to get cash from your existing mortgage or home equity.
Buying a house is one of the biggest decisions you will make in your life, and it can be intimidating to think about how to finance such a large purchase. Fortunately, there are several different financing options available for prospective homeowners.
This article will explore some of the most common financing options to determine which option is best suited for your needs. With this information, you should feel more confident when making an informed decision about purchasing a home.
Loan Options
Here are some of the loan options you can choose from when buying a house:
Traditional Mortgage Loans
Traditional mortgage loans are a financing option when purchasing a home, enabling you to spread out the payment over an extended period. This is important as it provides more leeway in covering up-front expenses such as down payments and closing costs.
With traditional mortgage loans, your monthly payments may be lower than what it would cost to rent an apartment or house, providing an additional incentive for choosing this investing option. Additionally, each month some of the amounts you’re paying go towards building equity in the house, and by making timely payments on the loan, you are raising your credit score.
USDA Mortgage
Purchasing a house is an important investment, and reviewing your financing options with great consideration is imperative. A USDA mortgage is one option offered by the United States Department of Agriculture that may offer favorable terms for prospective homeowners that meet certain qualifications. With this type of loan, borrowers typically will not be required to make a down payment, and they can benefit from lower monthly mortgage payments and other benefits.
Interest rates associated with USDA mortgages are usually competitive compared to other mortgage loans. Additionally, unlike other mortgages, there are no limits on where the property must be located to qualify for a USDA loan. Knowing what type of USDA mortgage is available and reviewing which loans fit within your budget can help responsible homeowners finance their purchases properly.
Home Equity Loans
Home equity loans are an important financing option when purchasing a house. It is important to understand what a home equity loan is and how it differs from other loan types. A home equity loan allows the borrower to access the equity they have built up, in their home, as a financial resource. This loan is based on a percentage of the homeowner’s equity and provides an alternative funding source for those looking to purchase or refinance a home.
Knowing your budget and researching the available options are key steps in determining if this type of loan makes sense for your circumstances. Understanding all elements, such as interest rates, closing costs, and repayment periods can help provide clarity about choosing this as an option for financing a home purchase.
Piggyback Mortgages
When considering different methods of financing a house purchase, piggyback mortgages should be an option that is carefully weighed. Piggyback mortgages are two loans taken out at once: one for most of the purchase price (usually 80%) and another smaller loan to cover the remaining balance (such as 20%). Using this technique, one can avoid expensive private mortgage insurance and keep costs down.
It is important to consider this method as a means of making homeownership more affordable and manageable by lowering monthly payments and eliminating private mortgage insurance from the equation. Potential buyers should research the caveats associated with piggyback mortgages to decide what financing options are best for them.
Cash Out Refinancing/Cash Flow Refinance
Cash-out refinancing/cash flow refinance is a financing option to consider when house hunting. Essentially, this type of loan allows you to get cash from your existing mortgage or home equity when refinancing your house. For example, suppose the current value of your home was higher than what you paid. In that case, you could use the additional funds for debt consolidation, emergency expenses, or any other expenses you choose.
It is important to weigh your options and measure the impact on your financial bottom line before deciding if cash-out refinancing is right for you. For example, it may be a good choice if it significantly lowers the rate of interest on existing debt or if the money can be used in investment opportunities that may bring more return than the interest portion of the refinance cost.
Gift Funds from Family or Friends
When buying a house, one of the financing options available to potential buyers is gift funds from family or friends. This form of financing involves using money given as a ‘gift’ towards the purchase price of a home. It is important to consider this option carefully; lenders may require documentation verifying that it is indeed considered a gift and not a loan that needs to be repaid in some other way.
Furthermore, most lenders dictate how much can be included as gift funds, usually about the total cost of purchasing the house. Understanding the lender’s rules and guidelines is critical when considering if this option is viable for a particular buyer’s situation.
These are just a few financing options available when buying a house. It is important to review each option carefully and decide which will work best for your situation. Understanding the various loan types, how they work, and the associated costs can help you make an informed decision about purchasing a home.
